Marcus is a financial analyst at https://opencashadvance.com
If you want to become a trader or an investor, whether part-time to make some extra cash, or as a full-time career, you need to be able to manage your money. This is an essential skill, and one which a lot of people don’t master. This can lead to losing all of your investment capital and even have a negative impact on personal finances and issues such as family cash flow.
Manage your cash properly to ensure that you have the biggest chance of success. It makes sense to set some rules before you get started and to understand money management. Don’t worry if you are new to it, or if you have already started and find yourself a little bit lost when it comes to how to manage your money. Our tips will help you.
The guide we have created focuses on both the logistics and sensibilities of managing money, but also some of the psychological side, which is something you need to master. Managing money within your head is just as vital as managing money in accounts. The most successful traders and investors are those who have the ability to let their brain override their impulse and approach it with a sensible, cool head.
Don’t Risk Cash When Learning
It can be easy to go into trading with an outlook of “what’s the worst that can happen” and get started with investing with little prior knowledge. The truth is that this is not a good strategy. Not only does it mean you can lose money, it means you can lose all of your money. There’s no point in sugar-coating it. Bad investments can see your hard-earned cash evaporate.
Surely trying to learn how to invest without actually investing is like trying to learn an instrument without ever picking it up? Actually, no.
Many investment brokers, apps and accounts can let you set up a “dummy” account with money to “trade” in an imaginary way. You can see a real simulation of what your decisions would do if you were using real money, and though there is zero return doing it this way, you can start to learn the ins and outs of the market without ever putting your money at risk. This is certainly a good way to get started.
Consider a Financial Adviser
Trading money and investing might be the most interesting and exciting prospect in the world to you. You may have dreams of becoming a trader and knowing the ins and outs of the industry. If this is the scenario you find yourself in then there is no problem going it alone (as long as you spend plenty of time educating yourself).
You may see investing as more of a “hands-off” approach. In this case, then it is a good idea to talk to a financial adviser and see what they can offer you. It is the role of a financial adviser to try and grow your money for you, and you don’t need to learn how the industry works. Just set a risk level and the investing can be done almost passively. There’s still a level of risk here so do be careful, but that doesn’t mean you should avoid this strategy. It is great for people with money they want to try and grow but who don’t have the time (or patience) for learning to trade.
When you think of yourself as an investor you might have a romantic image of financial independence and freedom from being tied to one place. This is all possible, but it comes at a cost. You might well end up having to spend a lot of your working day analyzing the figures. This is not something that is very exciting for people, but that doesn’t necessarily mean that you can find a way around it.
When you analyze your investments, the profits and the losses, you can start to work out what is going right and wrong. This is the way you are going to learn about what works, and no amount of online reading can actually do the job of analysis.
Learn how to chart your profits and losses, join as many industry forums and publications you can and keep in mind the fact that everyone has a slightly different opinion. Make your own conclusions.
Understand Modern Portfolio Theory (MPT)
MPT is crucial to understand when you are starting to invest. The theory stems from Harry Markowitz who was awarded a Nobel prize for his work in the Journal of Finance. It sounds like dry reading, and you might not understand how such an old text can still ring true in so many aspects of the industry, but it does.
MPT discusses how risk-averse investors are able to build their portfolios and make better returns with a lower risk. Risk is a part of the higher chance of reward, and this is unavoidable, but the theory discusses the “efficient frontier” that means you can get the maximum returns for your level of risk.
The work is hugely respected to this day and it makes perfect sense to read up on MPT even in the 21st century, long after the work was first written.
Always Use a Stop Loss
This is not optional! A stop loss is basically a form of protection that sets the level where you feel a certain scenario will not occur. If the stock drops, a losing trade needs to be offloaded, and this way you can ensure that you don’t lose more than is necessary.
For example, you could set a stop loss with a trader at 10%, this means when your stock is down 10% then it will automatically get offloaded. This risks not making money if the stock does rebound, but you can’t assume it always will. So, by setting this stop loss you are limiting yourself to a 10% loss. It still isn’t a good thing, but imagine losing 50% or more, something that does happen!
Set these rules for yourself and stick to them religiously, otherwise, there is no point in having them at all. A stop loss might as well not exist if it is not doing its job of preventing you from avoiding huge losses. It only takes one catastrophic investment to ruin you.
Build a Risk and Return Ratio
This is tightly linked to your stop loss. Basically, it means that your stop loss is less distant from the price you have bought the stock at than the price you expect to achieve. You can work out your ratio simply by comparing the two figures, and it is a good idea to go for a risk/return ratio of 2. This means that the money you expect to get back is twice that of what you could stand to lose. If you call more winners than losers this way then you are well on your way to a good profit.
Understand Risk, Ego and Personality
We did warn you that this would play a part! The psychology of investing is linked to the behaviors in your money management and there is no way to avoid that. You simply need to understand how your brain works, and the risky behaviors you are prone to.
Some people chase losses, for instance. This is ill-advised. We all have good days and bad days and one way to let this ruin your prospects is to let a bad day become an absolutely awful day by chasing losses, removing stop losses and taking gambles on stocks you’re not clued up on. It’s so easy to get frustrated.
Your ego can play a part in this. It is hard when you get stung on any stock, and this means that you might feel the need to quickly make up for it and get back in a good position.
Some trades are inherently incredibly risky. Don’t get involved in things like penny stocks, or if you do, make sure you are sure of the upside and that you only invest what you can afford to lose. These should simply not form the basis of your strategy. Manage your money properly and you will be able to work out how much you potentially have to invest in these high-risk strategies.
Your personality may not be your ally. Are you the sort of person who can have a rush of blood and make a bad decision? Your money management should be set up in a way to prevent this. Set strict rules and always stick to the plan.
Nobody said it would be easy! Whatever type of trading and investing you wish to get into, prepare for some sort of a struggle along the way. The key is to try and reduce the risks to your money, and adequate management with firm rules and realistic goals is the way to get to this end result with your money intact, and hopefully a nice profit or even a new career.