3. Trading small lots is uneconomic
If your brokerage is either flat-rate or minimum charge plus a percentage, trading small lots can be uneconomic, as the brokerage will form a relatively high proportion of the purchase price. If there is a minimum charge on your account, work out the size of trade required to ‘cover’ the minimum. For example, if your brokerage is 0.25% with a minimum charge of $25, the minimum trade size should be 25/0.0025, or $10,000.
4. Most hot tips are wrong
Beginning investors have a hard time deciding what to buy. They don’t yet have a system which identifies potential trades, and so they are unduly influenced by stories in the press or tips picked up at a party. Just accept that these stories and tips have no value for investment – by the time it appears in the press, the stock has already made its move, and you risk buying at the top. So you are left with three choices for stock selection – either pin a copy of the Wall Street Journal on the wall and throw darts at it, subscribe to a tip-sheet with a solid reputation, or do the work and develop your own trading plan.
More to follow....