The world of stock trading and investments is highly volatile and uncertain. Especially, if you’re a beginner, you may face a wide range of emotions when taking into account your next stock trade. You’ll be thrilled of outperforming market averages, or in a state of agitation about the risk of losing your capital. Whenever a piece of financial news makes you think about new security for your portfolio, it’ll be difficult for you to take a quick and profitable decision.
Below you will find a series of questions you may ask yourself in order to make a positive stock trading decision (every time):
Does Everybody Else Consider this as a Profitable Opportunity?
While you should be able to make your trade decisions on your own, evaluating other trader’s viewpoint on any particular investment opportunity can help calculate the associated risk. For instance, if a stock is disparaged all over, you should rethink your decision. Similarly, if it is accepted and acknowledged worldwide, you should still rethink about your decision.
Why? Because many times a sure bet in everyone’s opinion is not worth your investment. It’s also important to understand that the prices mainly depend on the market movements, so if everybody thinks that a particular company is a great investment opportunity, the price may get affected.
How Much Risk You’re Able to Take?
As a rule of thumb, you shouldn’t put more money into a single stock than you’re ready to lose. For example, if you have an idea that you could lose, let’s say $3000, on a stock and are able to move along with a powerful portfolio, you can keep on making timid decisions for your future.
However, if you’re inexperienced and have a small amount to lose, you should consider making a limited investment initially.
Have I Done Enough Market Research?
Let’s face it, every company is restricted by competition. You would not be able to make the right decisions if you’re focusing on just a single business in a particular space.
Here, you should search for the competitors. Think about their advantages and disadvantages. By knowing answers to these questions, you can better understand your prospective place in the trading world.
What is My Investment Timeframe?
Primarily, you can handle more risk if your investment time frame is longer as it gives you sufficient time to get back to your routine after committing a mistake. Also, it would be great to invest in illiquid assets if you’re saving money for, let’s say, your retirement.
However, if you’re planning to start a new venture or for instance need money to buy a new home within the next couple of years, you should invest in securities that are more liquid.
How Can I Find a Perfect Trading Match?
There is no denying the fact that commitment is the essence of trading. But if at any stage, you realize that your devised strategy isn’t working for you, you’ll need to examine your strategy.
Keep in mind, trading is similar to finding your soul mate. You have to invest in some time and keep yourself patient and calm to find a perfect fit.
Is the Company Profitable?
Being an investor, you should go through the quarterly and annual earnings report to determine the reported net income of the company. In addition to that, you can also have a quick look at the past financial stories to assess the real standing of the firm.
When Am I Going to Sell My Investment?
Ideally, you should have a clear idea of when you will sell your investment. If you purchased a share because you wanted to have 15% income growth per year, you should consider selling it if you didn’t get the expected returns.
Similarly, if you purchased a share because of high dividend yield, you should sell it immediately if its value drops.
Is my Investment Portfolio Diversified?
When it comes to stocks trading, diversification is certainly one of the most important things. Being a trader, you should learn the ways to diversify your portfolio. Try to maintain a good balance between different security types, bonds, stocks, and ETFs.
Is the Risk-Reward there?
This is certainly one of the most important questions. Is there a realistic profit margin accessible regarding near-at-hand key chart levels? You have to ascertain that your profit target and stop limit are in line with the prevailing market structure.
Do I Have an Exit Plan?
Do you have a trading strategy in hand if you want to exit this trade? At what exact level are you planning to stop? These aspects should be straightened out before actually entering the trade. In case of any sudden price action or any other dramatic event, you can interfere, but generally, you should stick to your pre-established strategy till the end.
Happy and safe trading ahead!