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Buying Stocks - 10 Tips For Trading Stocks

Many investors are interested in securities trading, but the stock market brings many challenges with it. There are a few basic rules to protect yourself against risks and generate long-term profits. We'll show you 10 tips to keep in mind when trading stocks.

Tips For Trading Stocks

Buying Stocks - 10 Tips For Trading Stocks

Define the right strategy

There are a number of different strategies available when buying stocks. A distinction is made between value investing in stocks and diversification. Value investing relies on a small number of selected and undervalued stocks with the aim of holding them until they reach their real value. It is a rather long-term strategy that was made popular by investor legend Warren Buffett among others. In contrast, there is the approach of broad risk diversification (diversification). 
 
The stock investor puts his portfolio together in such a way that the individual stocks never lose value at the same time, even in times of crisis. With this approach, however, the return opportunities are also lower than with value investing. The choice of the right investment strategy ultimately depends primarily on the type of investor: Do you belong to the security-oriented investors or to the risk-conscious investors?

Choose the right mix

In addition to the general strategy, the right mix of the portfolio is also important. This in turn depends on the type of investor. If you classify yourself as a conservative equity investor, you should rely more on established companies (so-called blue chips) from Western Europe or the USA, as these have a lower risk than, for example, stocks from emerging countries such as South Africa, India, China or Brazil. 
 
If you want to have a steady return of capital as an investor, you should add high-dividend stocks to your portfolio. A small portion of speculative stocks, e.g. from young, up-and-coming companies, can increase the return potential of the portfolio.

Obtain important information

Investors should obtain key information about the company before buying shares. First, it is advisable to take a look at the key financial figures. The price / earnings ratio can be a good guide. This is how investors can see what the share price looks like in relation to the company's earnings. In addition, the balance sheet should also be taken into account. 
 
In addition to the most important financial figures, investors should also take a look at competitors and the market environment. The company should have a decisive competitive advantage over its competitors and thus be able to develop a dominant market position in the long term.

Prove stamina

Impatient investors are left behind in the stock markets. A study by the magazine Finanztest among thousands of direct bank customers found that those investors who switched their share portfolios particularly frequently had an average return of 3.1 percent and were thus well below the market return of 8.7 percent. 
 
Because every time a position in the share portfolio is sold or added, the overall performance drops. The study shows that psychology is still the biggest trap for private investors. Inexperienced investors in particular tend to sell quickly in times of falling prices and thus miss out on long-term price gains. On the other hand, those who rely on long-term investment strategies will do better.

Work with stop courses

One of the most common mistakes that beginners make when buying stocks is not taking stop prices. For investment professionals, however, the stop-loss order is a natural tool. A stop-loss order is used to set a price above or below the current share price and to trigger a sell order for the shares. In this way, profits can be secured and losses limited. 
 
Often times, the stops are set 20 percent above and below the current price. If necessary, however, the range can also be selected larger or smaller. Should a phase of sharply rising prices come, the barrier can easily be moved upwards. It is important to keep an eye on the stop prices in order not to unintentionally sell off securities that are doing well.

Keep an eye on herd instinct

As an investor, you shouldn't chase every trend. Rather, it is important to take a critical look at the masses, because if an investment tip is already in the newspaper, there are no more bargains to be made. When asked about the secret of wealth, it was not without reason that investor legend Warren Buffett once replied: “Be fearful when others are greedy and be greedy when others are fearful!” So the art of successful investing is groundbreaking trends and spot promising companies before the crowd finds out.

Take profits

If individual shares have already risen by 30, 40 or even more percent since the beginning of the year, then follow-up profits are usually very difficult to realize. It is therefore advisable to take the risk out and take profits with you. An old stock market adage is therefore that no one has perished from profit-taking. 
 
Many investors follow this principle, which is reflected in the so-called sell-in-May effect. Accordingly, above-average capital market returns are achieved in the months of October to April. Hence the common phrase on the stock exchange: “Sell in May and go away. But remember to come back in September ".

Pay attention to insiders

Forecasts on the stock market are very difficult to make due to the many unknowns and are often wrong. So it doesn't make much sense for investors to orientate oneself on forecasts. What makes perfect sense, on the other hand, is to orientate yourself towards insiders. The insiders include leading managers of public companies. 
 
When executives pull their stock options or sell existing blocks of shares, it is a valuable signal for investors. Because these managers are much better informed about the company's situation than any outsider. You know the challenges, opportunities and risks.

Take geopolitics into account

Geopolitical risks are difficult to predict and just as difficult to price in, because most natural disasters and terrorist attacks come without warning. Nevertheless, it is important for investors to keep an eye on important geopolitical events in order not to be surprised by their outcome. 
 
These include important election results (e.g. Brexit) as well as crises and wars. This is because these have indirect effects on the financial markets and thus also on the investor's share portfolio.

Invest in companies

A large number of financial products are traded on the stock exchange: commodities and foreign exchange, derivatives, certificates and warrants. With derived financial products, high returns can be achieved through leverage, but the risk of total failure is also immense and, in the worst case, investors even have to inject more money (e.g. CFD). 
 
In contrast, stocks are not purely speculative bets, but real values. The indices rise in the long run and stocks have historically proven themselves through times of crisis. For example, the Dow Jones - one of the world's most important indices - rose from 66 to over 11,000 points during the 20th century, despite two world wars and numerous economic and financial crises.