3 Stock Market Trading Strategies for Beginners

 
 

Everyone needs to start somewhere, but the important part is that you start.

The younger you are the more time you have to let your money work for you and the quicker you can live off the profits. Not sure about you but I don’t want to work my whole life.

So how do we get to that point? How do we get started?

There’s a process I follow and have followed in the past. Start with a simple investing strategy and as you learn and get more comfortable, move into other types strategies.

What does that look like? Here is how I’ve categorized them.

  1. Index Investing

  2. Dividend Investing

  3. Active Trading

Over the years I’ve slowly built my trading plan to revolve around all three strategies but it takes time and patience. The first two are pretty straightforward, but the third strategy takes a little more time to develop and a lot more time to master.

Get my entire trading process for active trading. Sign up below with your name and email and I’ll send it right over.

    Index Investing

    This should definitely be your first strategy. This is one that all the financial advisors and even some big name bloggers, swear by. It’s by far the easiest and least involved, and who know’s you may already be doing it without knowing it in your company 401k or retirement accounts.

    The goal here is to contribute a portion of your earned income towards a specific index fund or mutual fund, consistently, week over week, without hesitation or thought. It should be an automatic withdrawal from your checking or even directly your paycheck into an account. That account should automatically, without your input, turn around and buy shares of the specific index or mutual fund.

    Over time, the ebbs and flows of the stock market allow you to accumulate more and more shares so that at some point in the future, you have accumulated a nice cushion that you can live off the gains.

    Compound interest works in your favor, which is why I suggested starting as early as possible. A simple $100 contribution every month, over 35 years assuming an average annual return of 7% will result in almost $200,000. Take those same parameters over 20 years and you have $52,000.

    Sounds great in theory but there are some downsides. What if you want to try to replace a portion of your income now? Can’t do it. What if the market crashes and goes into a recession? Tough luck, you really should stay invested all the time to accumulate shares at cheaper prices. Can you watch your money get cut in half? I know I’d have a hard time with that.

    Pros

    • Minimal time commitment

    • Easy to get started - pick a index fund

    • Auto pilot - contribute money on a set schedule

    Cons

    • No real income potential now

    • Investing for future use

    • Have to stay fully invested all the time

    Income/Dividend Investing

    This is your next best strategy. Similar to index investing, Income/Dividend Investing relies on building a large account where you can eventually replace a portion of your income with the dividend payments. You can do this with a dividend fund or by selecting high paying dividend stocks.

    This seems to be all the rage with the younger generations and for good reason. Again, start early enough and who knows, by 40 or 50 you could be accumulating enough dividend payments to replace a significant income.

    But there are several drawbacks to this strategy. Similar to index investing, you need to stay invested all the time so get ready for a bit of a ride during the market drawdowns.

    More importantly, can you ever build a big enough account to really replace your income. Maybe in some parts of the world but not here in New Jersey. Let’s assume I need to replace a $100,000 salary, what account size would I need. Assuming a 4% dividend yield (which is on the high side), then I need a $2.5 million dollar account. Not saying it can’t be done but wow that’s significant.

    Pros

    • Minimal time commitment

    • Easy to get started

    • Auto pilot

    • Can replace income

    Cons

    • Need a lot of money to generate a little bit of income

    • Assume a 4%/yr dividend rate, $100,000 = $4,000

    • Have to stay fully invested

    • Can lose more in capital depreciation than the amount gained in income

    Active Trading

    So you want the best of both worlds, long term growth and income potential. Well then you’re going to have to work for it.

    Active trading is a great strategy for those willing to put in the time. This is where you develop a process to navigate the stock market. It’s not easy so this is not for everyone but I believe if something is worth it then you owe it to yourself to at least give it a shot and figure it out.

    There are so many different ways you can look to actively trade the markets. Most of the ads for “services” and “strategies” you see either look to take on a ridiculous amount of risk for any trade or are day trading. They may work for some, but are definitely not my recommendations.

    Instead look at swing trading, where you buy a stock and look to sell it at a target. This way you have defined your risk and your reward before actually entering the trade. But this requires a time commitment, usually during the trading day, when if you’re just starting out, I assume you would be working.

    So instead of concentrating on the daily charts, use the weekly charts.

    That’s what I do and I’ll go over it more next week.

    Get my entire trading process for active trading. Sign up below with your name and email and I’ll send it right over.

      Regardless, please understand that this is the most difficult of the three options outlined but the most rewarding.

      Pros

      • Can replace income

      • Can profit from any market move

      • Alter amount of money invested during different market phases

      Cons

      • More time commitment

      • Have to compete against yourself

      • Learning curve with developing process / learning technical analysis

      Recap

      Don’t look at the above as three separate options but instead as the development of an entire cohesive trading plan. I currently have an index investing account (my 401k from work), an income account and my active trading account defined as the Weekly Trading Process. This not only allows me to capitalize on the benefits of all strategies, but spread out the risk and limit the downsides to them as well.

      It takes time to get from one to the next but my opinion is you need all three.

      Until next time remember to Stop Predicting and Start Reacting

      - Steve