I would like to use this platform to share my experiences and the lessons I have learned, with young investors. I am currently an undergraduate finance and economics student and have been trading for a few years now. I hope that my fair share of mistakes and youthful moments can help other people besides myself.
Here are my five tips for young traders:
1. Don't believe the hype
There are so many different news outlets and "experts" that are giving their opinion on different stocks and other investment ideas. Whether they are "five-star analysts" or are coming from another credible source, please remember that these are OPINIONS. It is important to take everything with a grain of salt in this industry. Nothing is a sure thing.
The first stock I ever bought was Fitbit (NYSE:FIT). This was when Fitbit's were supposedly the next big thing. I read a slew of articles on Fitbit's technology and witnessed analysts and Average Joe's alike speaking about Fitbit with so much conviction. I bought Fitbit in 2015 for around $35 and I ended up selling it six months later at $18 per share. I lost almost 50% of the $1,000 that I had invested. I was distraught. I work hard for that money, spending my summers working blue-collar jobs in a restaurant and as a camp counselor.
My advice to you is to formulate your own opinion by doing research. Look at a company's 10-k, 10-Q, S-1, press releases, etc. Look for company that are making and selling an actual good or service. See if the company has been making money year over year. See how much debt they have and how much cash they have. It is also important to recognize that past growth does not guarantee future growth. Simply put, do your own homework. Don't just copy someone else's and become upset when you get in trouble for doing so.
2. Know the Lingo
There are so many different terms for different investment strategies and choices. This relates to the first piece of advice because it is important to understand what these analysts and commentators are talking about before you shell out your money based upon their recommendations. Most terms can be Googled (I recommend Investopedia), but even if you know what a certain term means on the surface, it does not mean you truly understand the way it functions.
I was guilty of breaking this rule when I bought my first ETF. I knew in basic terms what an ETF was, but I really had no clue how they function. For example, I bought JDST. (I am sure some of you are laughing already). Nevertheless, I did not realize that JDST was an ETF that thrived on the depreciation of gold. To top that off, JDST also went through a reverse split in the mean time. Once again, I lost 50% of my original investment and had no idea why.
I also tried to trade an option once, but luckily I was talked out of that. Learn the language and the function of certain equities and derivatives before you venture. (Also, I would not recommend that beginners trade derivatives).
3. Stay away from penny stocks
I was particularly attracted to penny stocks because I was a young kid with not-so-deep pockets. So, I sought penny stocks because I could buy more shares of them, which means greater returns right? Not exactly.
First, I bought Aptose Biosciences (NASDAQ:APTO) for nearly $1 per share. In the ensuing weeks it reached $1.50 per share, so I sold and was on cloud nine. This is the definition of beginners luck. Next I bought Cobalt International Energy (NYSE:CIE) at 95 cents, and it dropped down to 40 cents very quickly.
Just because the price of the stock is cheap, it does not mean that the stock is undervalued and it is probably that low for a reason. As a beginner, look for a company that you believe in or a company's whose products you could not live without. Do not be like me and randomly come across a penny stock and buy it just because it is inexpensive.
4. Understand Macroeconomic market behavior and policy
Markets are not going to go up forever because business cycles exist. Please read works by John Maynard Keynes and Hyman Minsky's Financial Instability Hypothesis. These two economists turned me into a bit of a skeptic, but have opened my mind to the true way industry and financial institutions work. Understand the implications in interest rate hikes, real GDP, bubbles, and enacted legislature that frees a company's operations or inhibits them.
A great book that has changed the way I look at the economy as whole and keeps me grounded in my investing practices, is Zombie Economics by John Quiggin. You will learn in detail about failed economic ideas and policies such as trickle-down economics and the efficient market hypothesis. You will learn about the sheer functionality and cyclical nature of financial markets. More importantly you will learn about periods in time you may not have been alive for. This leads into another tip of mine, which is to keep up with the news and read everything that you can whether you believe the information or not. It can only make a more well-rounded person.
5. Be Patient
Patience is the most difficult part of investing in my opinion. This is because we are young and we want things now. However, if you look at the five year and ten year charts of companies on the S&P 500, you will see steady growth with a few blips for the most part. So my advice to you is to put some discretionary money into a large company with a great track record, and just leave it. Stick with that particularly company through recessions and through booms, then sell when you need the money. You will be rewarded for your loyalty and patience through dividends and the eventual payday when you sell.
The fact that we are young and do not have much cash to begin with is the very factor contributes to our eagerness to make moves. Try to overcome this. If you are thinking of buying a stock, try to simply watch and track it for a few weeks or even months, and the same theory goes for when you want to sell. Be discipline! I am horribly guilty of being too eager.
I bought shares of Alibaba (NYSE:BABA) and Jack in the Box (NASDAQ:JACK) when they were both trading in the $60 range. I sold them both in the $70 range. Alibaba is now trading around $120 and Jack in the Box is trading at $105! I still kick myself for not holding.
Don't be afraid to admit your mistake and learn from them! I am glad I made the mistakes I did, because I have become a better investor and a better person because of them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.