When it comes to growing your money, investing is easily the best way to do it. You can earn significantly more on returns from investing than you would with a savings account or a CD, considering the stock market is almost always trending upwards.
There are simple ways you can invest without committing much time. You could contribute to a 401(k) plan or go with index funds, which allow you to purchase a diverse portfolio of stocks.
Let’s say you’ve decided to take greater control of your portfolio, though. Here are five tips that will help you trade like the pros.
1. Make Trades for the Long Haul
Although the stereotypical image of a stock trader is a businessman making huge deals every day, most successful traders don’t do that. Instead, they look for long-term investments that they can hold on to for years and even decades.
Warren Buffett is one of the most popular investors in the world. One thing you notice immediately about his trading style is that he likes to invest in companies that he thinks will do well and hold his position as the company grows. He isn’t jumping in and out of trades every day.
Those who approach trading as a get rich quick scheme rarely succeed. Those who look at it as a way to gradually grow their money do much better.
2. Base Trades on Logic Instead of Emotion
As simple as this sounds, it’s the most difficult part of being a successful trader. You must train yourself to look at the numbers instead of going with your gut.
By default, humans make decisions based on emotions. We typically decide something based on how we feel, and then figure out why the decision was logical after the decision was already made. This is okay when you’re deciding which pair of pants to buy, but when it comes to stocks, you need to become detached emotionally.
3. Look for Value
There’s a temptation to look at a stock as a ticker symbol that could make money, but remember that each stock represents a company. When you’re investing in a stock, you’re becoming a part owner of that company, and you’re banking on its success.
Do your homework on a company before you buy its stock. You want to know how it can grow and continue to make money, along with any potential issues that could get in the way.
4. Don’t Risk Too Much
It’s important to realize that you could lose on any trade. Sure, if you’re investing in companies that have been successful for decades, you’re less likely to lose your money. But there are plenty of companies throughout history that were wildly successful for years, and then needed to declare bankruptcy later.
Set a limit for yourself regarding how much you’re willing to risk on any single trade. For example, you could decide that you’ll only put up to 2 or 3 percent of your account balance on a stock. Although this is a small amount, it ensures that you would have to pick wrong dozens of times in a row to wipe yourself out. The low-risk strategy pays off in the long run.
5. Build a Diverse Portfolio
Just like you don’t want to risk too much on any one trade, you also don’t want to risk too much on any single industry. Look at what happened to the people who invested heavily in real estate when the housing crisis hit. It was an industry many thought would never fail.
When you’re building your own portfolio from scratch, make sure you’re purchasing stocks from different industries.
Following these tips may not make investing seem very exciting, but it will help you develop a low-risk trading style and likely earn a steady return on your investments. Remember that the traders who make frequent trades and go for high-risk investments aren’t really investing their money, they’re gambling. That may pay off from time to time, but as a long-term strategy, the slow and steady approach pays out much more.