Using this stock investment guide may help you to acquire practical stock market experience that will pave the way to investment success.
Besides learning about the process of stock investing, you should try to understand personal emotions such as 'fear of loss' or 'greed for larger profit' that comes into play, both of which will affect your investment decisions beyond your imagination.
The experience you will gain by investing with real money is invaluable as the emotional highs and lows may make or break your initial view of the stock market.
This guide is adapted from Gerald Loeb's bestselling classic titled 'The Battle for Investment Survival'. He worked as a stock broker on Wall Street for more than 40 years and shared some timeless stock market wisdom in his book.
There is only one way to gain real market experience and that is by trading the stock market with an 'experience fund'. Your experience fund should be small, preferably less than $10,000, even if your starting capital is in the millions. In the stock market, a $5,000 loss and a $50,000 loss will teach you similar lessons.
Open a live trading account with a reputable broker
Select one reputable company, preferably listed as one of the Straits Times Index component stocks or undervalued stocks
Before your purchase, write down the reason (yes, one reason only) for selecting the company.
Buy it at the time when you feel the price should go up. Subsequently, sell it at the time when you feel the price is going to drop.
One rule applies: You can buy only one stock at a time and you have to close out your position at a profit or loss in each one before switching to another stock.
When you cannot decide if you should hold or sell the stock, refer to the reason you wrote down before buying the stock. Is the reason still valid? If not, it may be time to let go.
Obviously, following this stock investment guide process is going to take time. Try it out for a few weeks. The method seems simple but it may not be easy to execute.
This simple exercise should show you 3 important lessons in stock investment.
1) The stock market does not care what you think,
2) your emotions, not your logic, is in control when you invest in the stock market,
3) the reason why you buy a stock in the first place should be the reason you sell when it is no longer valid.
Over the course of your buying and selling, you are likely to make some of the common mistakes made by most beginners. How do I know? I made those mistakes too.
It sounds great in theory. Buy and sell stocks for a few months on paper or demo account and make a profit before you put any real money on the line.
The flaw in these 2 ways of gaining market experience compared to the stock investment guide above is that the psychological aspects of investing do not enter into the equation.
Fear of losing, greed for more profit, panic when market crashes, all of which may affect your investment decisions are not considered.
Having said that, paper trading is not without its merits. If you are able to follow a proper stock investment process and churn out a profit while paper trading, the transition to real money investing will be a much smoother process as you've only got the psychological part to deal with.
If you are in the top 50 percentile of your cohort, profession, or industry, I congratulate you for achieving the success you have obtained through your hard work and commitment.
Before you climb to the top 50 percentile in your field, did you put in the time and effort to gain the necessary experience? The stock market is no different.
Just remember, the stock market is a totally different playing field from your area of specialty. Your confidence must come only from your success in the stock market.
The bottom line is, to make a killing in the stock market, figure out how not to get killed first.