DON’T FEAR THE STOCK MARKET
In December of 2018, we had a massive correction. I had just started trading on my own, and this correction really freaked me out. The stocks were going down, I was losing money, and I panicked. As soon as the market climbed back up to where I was breaking even again, I sold everything and I got out. I didn’t know what I was doing, and I needed to learn more. Later on, I realized that when I was panicking, I shouldn’t have been selling — I should have been buying more stocks. When the market corrected earlier this year, I did so much better. Here’s what I’ve learned about trading in the stock market.
Lesson 1: Don’t Sell Stocks, Take Profits
You can’t time how the market will behave. In February, we saw a record-breaking fall one day followed by a record-breaking high the next. You can’t be dumping all of your stocks and rebuying them every time the market flip flops. When I buy stock, I have a strategy for when I will sell, regardless of what the market does. It’s important to take profits
My favorite stock so far has been Shopify. When I bought stock in Shopify, my plan was to hold those stocks until they gained 25% in value. Then I would take out just that 25%. So, when the stocks rose from $100 to $125, I took out the $25. That way if it drops back down, I haven’t lost anything. Then, if the stock rises to 50% of the initial value, I take out another 25%. Then, when it reaches 100%, doubling in value, I take out everything that I paid for the original stocks. All that’s left is free money, and I let it ride. Now I don’t have to worry about what happens to the stock.
Lesson 2: Don’t Get FOMO About Stocks
A lot of novice investors make the mistake of seeing no-name stocks rising suddenly and jumping on the bandwagon. They’re trying to get on board early with the next Apple, but these stocks ultimately drop back down into nothing because they’re speculative stocks.
Spec stocks, as I call them, are for companies that claim to have a solution to some problem, but they don’t have any real value. For example, I sent someone a referral code for the trading app I use, Robinhood, and got a free $3 stock. I checked out this stock and decided to invest $250 into it. The next day, this random company announced they were going to start testing potential vaccines for COVID-19. Overnight, my stocks doubled in value, shooting up to $500. I followed my first rule and took out the profits.
Here’s the thing: That stock still wasn’t worth anything. The company didn’t have a vaccine. In fact, they hadn’t even started testing yet! But other people saw the potential value and poured their money in. That caused the stock’s price to skyrocket. Then more people notice and put their money in, causing the stock price to rise even faster. They had a fear of missing out, or FOMO; they were afraid of missing out on a good stock. Smart, savvy investors realize that there’s no real value in the stock that’s making it rise so much, so they pull out. The stock goes down just as quickly as it went up. I’ve seen this happen a number of times.
Spec stocks aren’t inherently bad. I do have a few spec stocks in my portfolio because I see potential in them. What you don’t want to do is jump on a spec stock when it’s already climbing. By then it’s already too late to get any real profit. Don’t be greedy and jump on speculative stocks. Invest in real companies that will stick around.
Lesson 3: Buy Low, Really Low
People tend to freak out in these corrections, but Warren Buffett has become extremely rich because he understands their opportunities. If you’re buying stocks when things are going well, then you’re buying at a less-than-optimal time. I’ve learned to have some money set aside so when the market drops, I can buy more stocks.
Earlier this year, I broke my “stock budget” into four chunks. My plan was to put in half of it when the market went down to the bottom. If it went lower after I invested, I would put in another quarter of what I had set aside to invest. I held the last quarter in case the market went down even lower. If the market didn’t drop again, then I’d keep that money. I don’t buy for the sake of buying. I buy with strategy, when the market is in a correction. I commit to a few stocks and stick with it.
Lesson 4: Get Educated
One of the things that helped me the most in learning how to invest was subscribing to The Motley Fool’s newsletter. This is a financial and investing advice company that does a ton of research then emails out weekly stock tips, which are based off the profit earnings (PE) ratio. I’ve invested in some of the stocks they’ve recommended and received a nice chunk of change in return. This helped me learn to identify good stocks on my own. The last few emails I got from Motley Fool included stock recommendations that I had already bought on my own.
These are the lessons I’ve learned from two years of obsessing over the stock market. Now, I’m not a financial advisor, and I don’t know your financial situation. This is what I’ve learned in my experiences trading stocks on my own, but I’m not suggesting everyone should be doing this. This is nice if you have spare cash, but it’s not a long-term strategy. Talk to a professional about your retirement plan.Investing in the stock market can be a great strategy to build your finances, but if you don’t know what you’re doing, it’s easy to act in a panic and suffer big losses.
Be smart about it.
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