Beginners should learn how to trade and invest before they buy and sell stocks. The first time you buy a stock is like jumping into a car for the first time. You need to learn the basics or you could end up in a financial “crash”. And for people who make money from the very beginning without learning anything, all they’re doing is relying on blind luck. That’s like walking through a minefield with your eyes closed and praying for the best. They might get lucky and do well for a few years, but sooner or later they’ll blow up.
Before I show you how to get started as a stock market trader or investor, I would like to address 2 common misconceptions among beginners:
- You can “get rich quick” by trading
- You can “earn a steady income” from trading.
These are 2 of the biggest lies that many of the “I will teach you how to trade” gurus preach. They preach these 2 lies because doing so “sells the dream”. These “gurus” make their money by selling you a fantasy.
For just 3 small payments of $99 a month, you too can trade and drive a Ferrari like me!
You can “get rich quick” by trading
No, you can’t.
Do you know how much the U.S. stock market goes up each year (on average)? 7-8% a year. So if you think you can CONSISTENTLY make 200% a year from trading year-after-year, what you’re really saying is that you’re going to be the one-in-a-million who becomes a billionaire overnight.
The media loves to promote 2 kinds of headlines:
- “Here’s why the stock market is going to crash 50%.”
- “Here’s the 20 year old who made $10 million from Bitcoin.”
As you can see, both of these headlines are sensationalized and do not reflect reality for most people. Financial media loves sensational headlines because it drives viewership and more ad $$$ for the media organization.
Here’s the fact:
An average annual return of 20% a year is highly respectable: most professional traders can’t even average 10% a year.
And remember: it doesn’t matter how much money you make on a year-to-year basis. If you make 100% this year and lose 50% the next year, you are right back to where you started. CONSISTENTLY HIGH RETURNS are what counts.
A lot of trading gurus will tell you “I made 100% last year, and 140% the previous year”. Of course they won’t tell you that they lost -80% the year before. Taken as a whole, this kind of trading advice is disastrous.
You need money to make money
You see these on Youtube and TV infomercials all the time. “I made $10k day trading yesterday! Find out how you can too!” Meanwhile the 20 year old Youtuber is driving his Ferrari in the background.
This is a load of BS. Plain and simple.
The exact dollar figure means NOTHING when trading. When someone tells you “I made $10k trading yesterday”:
- They don’t tell you how much money they started off with. A lot of the 20 year old “gurus” preaching how “you too can make $10k a day trading, just like me!” started with $5 million of daddy’s money. $10k on a $5 million portfolio is chicken scratch (0.2%)
- They don’t tell you what their overall returns are. These “gurus” don’t tell you “I made $10k yesterday, but I lost $20k the day before and year-to-date I’m only up 5%”. Back in my family hedge fund days, we used to easily make or lose $500k a day. $500k sounds large, but that was chicken scratch in percentage terms because our portfolio was large.
In the trading and investing industry, you need to have money to make money. You’re not going to turn $10k into $1 million in 2 years. Sure, some people might do it, but that’s one-in-a-million. Realistically speaking, that is not going to be you.
In trading, how much money you make DOES NOT MATTER. It doesn’t matter if you made $100 or $100 million. Why? Because trading and investing is a percentage game. Your profits are a percent of your portfolio’s size.
Here’s a simple example. Let’s assume we both buy stocks.
- You make 20% on a $10,000 portfolio. You made $2,000
- I make 1% on a $1 million portfolio. I made $10,000
As you can see, there’s no way for “you too to make $80,000 a year” if your portfolio is tiny. The exact dollar amount that you make doesn’t matter. What matters is your percentage return.
There are always fly-by-night successes. Ignore these. Anyone can gamble like crazy and become an overnight millionaire with Bitcoin or weed stocks. But how many people keep these profits in the long run? Easy come, easy go. Most of these overnight successes flame out in the long run when their blind luck runs out.
You can “earn a steady income” from trading
This is another favorite phrase from the “I will teach you how to be rich” gurus. These gurus tell you “here’s how you too can make a ‘steady income’ from your portfolio, just like me!”
Trading is not an “income”. It is not possible to make a consistent X% or $X, day after day.
- You’ll make money on some days and lose money on other days.
- You’ll have some good years and you’ll have some bad years. Even the best investors and traders go through stretches of losses. This is a normal part of the game.
Anyone who’s been in finance long enough knows that there is no way you can earn X% a year, year after year. You know who claims that you can make a consistent X% a year, year after year? Ponzi schemes (e.g. Bernie Madoff). These scammers typically end up in jail (Bernie Madoff was served with a 100+ year prison sentence).
Other people who talk about investing and trading as an “income” are referring to the concept of “dividend investing”. Here’s what “dividend investing” is, in a nutshell:
- Dividends = cash paid back to shareholders by the companies.
- For example, let’s assume that I own 20 shares of Apple stock. Apple issues a $1 dividend per share, each year.
- As a shareholder in Apple, Apple “pays” me $20 a year in dividends! (20 x $1 = $20)
Many companies have an automatically recurring dividend plan. For example, many companies automatically issue a dividend once a year or once every quarter (3 months).
The concept behind dividend investing = dividend investors should find stocks that issue large dividends. Surely, the more $$ a company pays in dividends to investors, the better off investors must be, right?
Some people see dividend investing as “passive income”. Just sit back, relax on the beach and let the money roll in year after year on a steady basis!
You see these kinds of ads on Youtube all the time. “Here’s how you too can make $80k in annual income from dividend stocks, just like me!” In the video, the Youtuber describes how he makes $80k in dividends from a $3 million portfolio each year.
These ads are misleading, to say the least. $80k in dividends on a $3 million portfolio = a 2.6% annual return. A 2.6% annual return is chicken scratch. These videos might as well be re-titled “Here’s how you too can underperform, just like me!”
*The stock market goes up an average of 7-8% a year. So if you’re making 2.6%, you’re underperforming by 5.4%
Many people who think about dividend investing as “passive, steady income” don’t understand the basics of dividend investing.
When a company issues a dividend, the stock price FALLS by an equivalent to the dividend $. So dividend investor don’t actually make any money at all!
Here’s a simple example.
Let’s assume that I own 2 stocks:
- Stock A doesn’t issue a dividend. From the start of the year to the end of the year, Stock A goes from $100 to $110. I made 10%
- Stock B issues a $2 dividend once a year, at the end of each year. Stock B begins the year at $100. It goes up 10% (to $110), and then issues a $2 dividend. Because of the $2 dividend, the stock price is automatically adjusted from $110 to $108. As a shareholder, I now have a stock worth $108 and $2 in cash.
As you can see, these 2 things are EXACTLY IDENTICAL. In both cases I have $110 worth of assets.
When dividend investors assume that they’re making a “steady passive income” from their stocks, what’s really happening is that value from the stock price is being transferred to cash.
In reality, there’s no difference between:
- Owning stocks worth $100k vs…
- Owning $80 worth of stocks and $20k in cash.
Some people think that dividends are a “steady source of income”. This is factually incorrect. Companies don’t keep growing their dividends year after year, nonstop.
Dividends are the first things that companies cut during recessions. Many dividend investors in 2008 (during the financial crisis) received NOTHING because companies were trying to conserve cash by cutting dividends.
There’s a lot of BS in the finance industry that’s perpetuated by “gurus” who don’t have your best interests at heart.
Successful trading OVER THE LONG RUN (not just a fly-by-night success) is a combination of:
HIGH PROBABILITY TRADING + RISK MANAGEMENT
It is not possible for every single trade/investment to make money. You will have some winners and some losers.
But you will make money in the long run as long as:
- Your winners exceed your losers, and…
- You exercise risk management so that a single loss doesn’t wipe you out (e.g. you don’t lose 80% of your money in a single trade/investment).
Now you know what doesn’t work.
- Trading is not a “get rich quick” game. 10-20% a year is highly respectable. Fly-by-night successes typically crash and burn in the long run.
- Trading is not an “income”. You will not make a consistent X% week after week, year after year. What matters is how much money you make in the long run.
I will show you WHAT DOES WORK and how to become a successful trader throughout the rest of this trading for beginners series. I have simplified many of the explanations to make it easier for beginners to understand.
Trading vs Investing
“Investing” is generally seen as longer term (i.e. you hold a stock for a longer period of time), whereas “trading” is generally seen as short term (i.e. you hold the stock for a shorter period of time).
For the purposes of these tutorials, we use “investing” and “trading” interchangeably. The line that separates “investing” from “trading” is vague and blurry.
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