Buying Shares – Chapter 10: Investing Methodology: Planning Trades and Picking Stocks

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 10 out of 19. Read the rest: Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1:

Buying Shares – Chapter 10: Investing Methodology: Planning Trades and Picking Stocks

This is chapter number 10 out of 19. Read the rest:

Before you purchase any stocks, settle on what type of investor you are, and then make an equivalent stock trading plan to assist you to stay focused and reduce your overall risk. Remember to stick by your plan even in times of heightened stress.

Investors can generally be classified in three categories:

Growth investors, dividend investors or value investors – Which type of investor, suits your personality and lifestyle better?

If you’re the positive kind, growth investing might be for you. If you possess a lot of patience, you may want to consider value investing. Want a little extra income on a regular basis? If so you might be more interested in dividend investing.

Growth Investing

Growth investors watch out for companies who are expected to raise their sales and earnings from year to year. The stock prices will generally reflect how gainful investors think a company will be in the near future. You should look out for companies who are expected to raise their income by at least 10-15% from now until the next year. This tends to be the path of investing that newbie traders take on.

Value Investing

Value investors have a tendency to choose stocks that were once doing very well but have fallen in grace, so can be bought for cheaper. This tact makes sense if the company’s stock value is low due to short-term troubles that can be easily resolved. Once the company’s fortune turns around, the stock values should reach the highs again.

This investing style involves more research then growth investing. You will need to carry out quite extensive studies on the companies you’re looking at investing in. It also means you need to have quite thick skin and patience to weather the lows and wait for the highs.

Dividend Investing

Dividend investors will buy stocks that give a cash dividend over time- this is effective as an income base for the investor. Dividends are generally paid on a quarterly basis, so effectively they give money at the time when they hold the stock.

Mostly, dividend investors purchase stocks as much for the ongoing profits as for the wealth appreciation which is the difference between the money the stock is bought at to the money made after selling or the return. Dividend investors watch out for economically stable companies that are expected to carry on paying dividends to the investors.

Creating a Stock Trading Plan

Once you’ve made a decision about which of the three above traders types you are, your next step is to create a trading plan. This is something that most professional traders do and very necessary if you want to limit your losses. This is particularly true of the day trader who might make over 10 trades a day. At this rate stress is a great factor in how your trades perform. For instance you might decide that you will sell your position if it makes a loss of 10%, the emotional trader ignores his strategy and stays in hoping to recoup his losses. Bad money follows good and before you know it you’ve blown the lot on just a few trades. Bad strategy!

Paper trading or opening a demo account and using it as a training tool for between 3-6 months before you invest real money is also highly recommendable. A good trader is always an educated trader. Simulating real life trades either on paper or in a brokers demo account gets you in the habit of using analysis, both technical and fundamental and in the habit of good trading technique.