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Sunday, March 11, 2012
While its tempting to start reading about penny stocks and software for stock trading, its best to start with the most simple elements first.
Investing can be defined as ownership in a business. When a private company needs to expand its business, it has 2 choices. First, they can take out a loan - which can be difficult if its not generating profits just yet. On the other hand, they can also seek out investors who are interested in buying a portion of the company. Buyers of these shares become owners of the company. The company in return gets much needed cash. When the company does well, the value of your shares move up. When the company isnt making money, the value of your shares moves lower.
Each company will have its own level of demand for its shares. The more popular, the bigger the demand. You can choose to invest in a company that has a history of stellar performance, or you can choose to invest in a company that has had its share price beaten down, but looks like it may be a turnaround story. Most would go for the first one, but, most investors try their luck with teh second. This will cause more people to get interested in investing with the former company. Such a high demand among people would result its share prices to climb up. Conversely, the stocks of a company with low demand will see their prices drop. A company that grows its business is a steady fashion can normally look forward to seeing their share price move in a steady fashion. The same cannot be said for companies who display varying performance in their results. The movement in prices attract traders who seek to take advantage of stocks that are overbought, or oversold. A stock trader simply seeks to buy low and sell high. A trader aims to profit when the markets are rising and when they are moving lower. Stock trading is the name of this process.
Think stock trading is for you? A lot of people think they can time markets.
While normally investing in the stock market is a smart thing to do, a smarter thing to do is pay off your debts first. Paying off your credit card debt makes more sense than investing. The debt will cost you a 15% interest rate. By paying down your credit card debt, you're earning 15% a year - something that is difficult to make in the stock market. Once you are debt free, then you can afford to risk your money. Anyone can become a shareholder of a publicly traded company. And if you are a little careful and make well-informed decisions, the stock exchange can pay you huge profits.
Is it possible to make a consistent retrun year after year?
If you are just starting out, I would suggest not quitting your job. It will take almost a full year before you can expect to start making money trading online - if you can do it at all. A lot of people won't make it past the year. Don't let low commission rates trick you into thinking it will be easy. It wont be. Don't go all in. Spread your money around 5 position - possibly even 10. If you want to stay in the game long term, its all about risk management. Position sizing contributes greatly to that. Successful traders know how to manage their risk. If you learn how to manage your risk, your profits are going to look even better. That is how to ensure you'll be trading for a living sooner than you think.