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Before you start stock trading: first think if it is worth your time and money

Today people are bombarded with lucrative offers from various trading companies offering $10, $7 or even $4 per stock trade. It looks very tempting to sign up and start trading since the terms are much better than it was before the Internet trading was possible.

That was the good news. The bad news is that those companies are selling you the tools and service only. They do not sell you any guarantees of success. It does not matter if you profit or lose money, the trading company will get its fee for each trade anyway.

Since you are considering going into the stock market, most likely you are planning to get a significant return on your investment which should also be better than what you would get by investing your money into mutual funds (less risky than single stocks) or even no-risk certificate of deposits (CDs) where returns are guaranteed.

Well, how can you get such returns? The answer of course is simple and well known: buy low, sell high. If you do it most of the time, you’ll be a successful stock trader. Now the first problem comes: how do you know when to buy? There are probably several ways to do that, we do not discuss this here, let’s assume that you know somehow or think you do know. Let’s say you got lucky and the stock after you bought it is going up, just as you planned.

Now another problem comes: when to sell? After the stock is up 20%, what do you do? Sell now, or wait until it is up 50%, 100% or 200%? Do you listen to investor news and do what everybody else does: selling, buying more, or continue holding the stock? If you choose one of the first two options, how much of the stock should you buy or sell? Or if you hold the stock, are you sure it will continue to go up, or you may end up waiting until the stock price is back to the original and then lose its value resulting in your losses.

The truth is some people actually do know the answers to those questions most of the time and actually make profit. The question is, are you as good as those people? Most people are losing money guessing and trying to time the market. If you’re new in this game and not planning to spend much time on research, chances are you will lose. You will be competing with professional traders, big players and insiders who profit mostly because many others keep losing. Plus, what are the chances that you can predict the market? The chances are very slim.

Some may argue: “I had that stock, I sold it when it was up 20%, but if I did not sell it at that time, now it would be up 300%. How stupid I was when I sold it, if I did not I’d made a lot of money. I have to do this again. It really proves that I can make a lot of money there and it’s easy!” That is right you can make a lot of money, but it is not that easy as it looks. Let’s assume you did not sell the stock at the time it was up 20%. Then what makes you think you would wait until it is up 300%? You may have sold it when it was up only 25%. Or it may go down several times below 20% increase, you could have thought it was going down forever and sold it even with a lower than 20% profit.

The bottom line is that it is easy to look at the past and see all the mistakes you’ve made. However, it is very difficult to do the right things for the future. Unless you know market trends well, understand related industries and stock company financials, most likely you will not be able to make profitable trades. Even professional traders do mistakes and lose money. If you are not one of them or not planning to become one, your best bet would be investing into CDs, mutual funds or your own business.