Basic rules for those who are going to start investing in stocks

Posted on 16 de June de 201920 de March de 2023 by Carlos Martins

1. Focus on price

Educated investors follow a very different set of criteria. Investors focus on a single consideration: price. It may be a poorly run business, but if conditions call for a brief improvement in its price, it’s a good buy for the trader who knows when to step in and when to jump for a quick profit.

On the other hand, a large company sometimes goes out of its comfort zone to a price where, suddenly, there are more willing sellers than buyers. This means that the price is about to drop, and it is the short-term seller who will reap the benefits.

2. For Investors: Stay liquid

There are two main components to this rule. First, the stock has to be actively traded – at least 100,000 shares in daily volume. If you trade stocks below this level, you risk being trapped in a position simply because there are no traders on the other side. Second, you should stick with tickers with a price below $60, simply because liquidity requirements above this level become a distraction for most traders.

3. Practice before joining

This is arguably the most important rule of stock market fundamentals. Instead of investing in the broad market, you should consider following a few tickers and knowing your trading range very well. Remember, this is a basic stock market approach that focuses on price. Once you know where you “should” trade then you will be well placed to identify a deviation from the norm and act quickly towards a positive outcome.

This is the opposite of “buy and hold” because you can carry a stock in the morning, dump it in the afternoon or a day or two, then buy it again when conditions change. It’s an agnostic approach to markets where the most important consideration is your own desire to succeed.

4. Don’t try to overthink the markets

Here’s a scenario you’ve probably witnessed: a company in an industry has a bad quarter, or maybe a product recall, and all stocks in that industry decline even though the other companies didn’t do anything wrong. It’s illogical, but that’s how the market works. Likewise, mediocre companies will go up in price when the market is hot because “a rising tide lifts all boats”.

When you are only focused on price you don’t need the markets to be logical. You simply want to identify zones where supply and demand are likely to be out of balance, then buy or sell when price enters those zones.

Experience tells us that there are large amounts of unfilled buy or sell orders at these price levels, and once the orders are filled, price will change direction regardless of what else is happening in the economy or the market.

Basics for investing

Most people have two buckets of cash in their lives. The first bucket is our income. It’s what we live outside, take vacations and run the house with. The other bucket is usually bigger and contains our wealth.

To fill our big bucket, we need a plan. We need to ask ourselves a series of questions and be very specific about the answers.