How to Become a Stock Market Ninja
There are millions and millions of dollars to be made in the stock market. Unfortunately there are also millions and millions to be lost. Any novice can read a few books, learn some Wall Street lingo, and start to think of themselves as some sort of stock market cowboy. But in a game where even veteran investors sometimes get burned, rookies are almost certain to lose money if they aren’t completely prepared.
Wall Street has a pretty high intimidation factor, which causes most people to either opt for mutual funds or adopt the buy-and-hold strategy that was popular with past generations. Of course, recent stock market plunges have hurt buy-and-hold baby-boomers just as they are getting to retirement age. The lesson: those without a decent understanding of the market can get hurt no matter how conservative their investment strategy is.
Yes, the stock market is inherently risky, but that doesn’t mean you have to avoid it.
You can open an E*Trade account and simply jump into the deep end and play with a few hundred dollars until you get the hang of it. But a better idea is to get a solid set of skills and a high level of understanding before you risk even a single dollar. Here’s how:
Whatever your opinion of CNBC and sites like TheStreet.com, they can be useful resources for novices. This is not because you can get stock tips, but because you can listen to the constant chatter on these media outlets and get to a feel for the language of investing and to begin to understand what issues are important to experienced traders.
Once you’ve grasped the lingo, the next step is to find a solid strategy that fits your goals. The best way to do this is to find a stock market guru and familiarize yourself with their strategy. Legendary figures like Warren Buffett and Benjamin Graham have stood the test of time, while relative newcomers like maniacal Wall Street personality Jim Cramer have their followers as well. Cramer has written loads of books and might be a good guru for someone who really wants to make trading a part of their daily life.
Investor and author Phil Town, best known for his Rule #1 book, is a good choice for those who want a more contemporary, straightforward take on the value investing strategies that made Warren Buffett billions. This strategy involves buying the stocks of solid companies when they are underpriced and then riding them back up until their price actually matches their value. While these longer term investments might not seem as sexy as playing the market all the time, taking huge profits without having to sit at your computer day-after-day can be quite a turn on.
Whose philosophy you choose to study depends on your personality and your goals. It has to make sense to you. If it doesn’t, move on to a different guru. Perhaps technical trading, which is basically exploiting patterns in stocks’ charts and data, would appeal to your horn-rimmed-glasses-wearing, geeky side. Or maybe you are able to grasp the concepts of fast-paced, momentum trading styles that seek to take profits from spiking stocks and then get out before the stock nosedives back to reality.
After you have chosen a style, you can personalize it.
No matter how successful someone else might be and how many tie-wearing talking-heads sing their praises, there is no one-size-fits-all, always-right approach. But there is a way to teach yourself to get it right most of the time without having to risk any cash. If you’d rather spend your hard earned dollars on beer and other necessities instead of paying for the stock market learning curve, you can start your career as a paper trader. Paper trading is practice trading using real life stock prices. It’s like using monopoly money until you earn your Wall Street black-belt.
Different pay and free sites offer trading games with varying levels of sophistication. If you are interested in short term trading, it might be worthwhile to sign up for a pay service for a few months so that you can get an experience that is as close to reality as possible. For those who want to follow the Buffett/Phil Town school of investing, simply going onto Yahoo! Finance and keeping track of your “trades” on paper should be enough to increase your confidence. Once you have achieved ninja-hood (making mostly profitable paper trades and having absolute confidence in your system), you can consider yourself ready for the real thing.
Still, it’s a good idea to start the slowly, no matter how sure you feel. When real money is involved, your emotions can sometimes take you away from your game plan and lead to large losses. Just concentrate on building your bankroll – you can always add more funds after you are sure that you can make cold-blooded trading decisions without emotion.
If you are a successful trading ninja, taxes can become an issue. While you don’t want to completely ignore the IRS and end up in a cell next to Wesley Snipes, you can use the complex tax code to pay as little as possible to Washington’s spend-happy suits. Long term investments carry a lower tax rate compared to stocks that are held for less than a year. If you are investing for retirement, opening a Roth IRA is a good choice because profits made from money in the account aren’t taxed, ever. At the very least, you can set aside 15%-25% of your short term stock market profits for possible taxes.
It pays to be methodical when it comes to learning the stock market game. There is no substitute for knowledge, practice, and a personalized strategy. Sure the idea of calling yourself a Wall Streeter and maybe even earning enough so that you can quit your day job and sit around in your boxers trading from your home computer is very attractive. But patiently honing your skills until you can take profits from trade after trade is the best way to become a stock market ninja.
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About Josh Lew Josh Lew lives in the Midwestern US when he is not traveling. He is a columnist for Gadling and has contributed to Hackwriters and Skive Magazine.