Stock Market Money Management

Money management is the single most important skill, I want you to develop. Though stock trading is one of the best ways to invest money, if you are careless in managing money, you are doomed. It is in this arena most stock trading casualties occur. Here protecting your capital is the first step to create capital. And it is money management which keeps you floating in the ocean of stock trading.

When I say capital I talk about two capitals.

• Psychological Capital
• Cash Capital

Psychological capital is much more important than cash capital. If you loose a little of the former, then you loose a lot of the later. Your proper money management guards both of them.

Are you fresh enough for some important learning? If not take a cup of coffee or take a good sleep plus coffee. Get the following straight. Please do not deviate from this guidelines and repent.

Your first investment is 10% of your affordable money.
Invest only what you can loose comfortably. If you loose that you should be able to tell me, 'Hey I lost just a bit. Nothing to worry about.' This money which you can afford to loose is what I call as 'affordable money'.

Irrespective of how rich you are, just invest only 10% of your affordable money which is meant for stock trading. Let us call this as x amount out of 10x total. (Little algebra. Hi!) Once this investment doubles, you have 2x amount in your trading account. Put in another 20% i.e. 2x of your available cash. Now you should be having 4x amount in your trading account. As this grows into 8x i.e. double, add another 2x amount to trading account, totaling 10x. Now you have 10x in your trading account and 5x in your bank.

Did I confuse you? O.K. I will tell you in a different way. Continue reading.

Let us say you are rich enough to consider a loss of $10000 as affordable. Invest only $1000 as your first investment. When your investment doubles, that is, when it becomes $2000, add another $2000. When this $4000 is doubled, making it $8000, add another $2000. Now you will have $10000 in your trading account and $5000 in your bank.

Now you have a trading investment equivalent to your original affordable money. Plus you have 50% still remaining in your bank as standby. With all this account and a successful trading experience, you are going to make a good start.

Congratulations! Your probationary period is over.

Always divide your investment into 2 or more equal parts and invest in 2 or more trades. 2 is ideal, 5 is max. Take trades which risks only 2% of your budget for that trade.

Learn to think in terms of percentage and not in terms of actual cash. In the beginning when you are investing only a small amount(say $1000), if you earn $20, you may not get thrilled. But it is 2% on your investment. 2% profit per day means more than 500% of profit per year! At the same time if you loose $20, you do not feel bad. But again it is 2%. If you keep loosing $20 per day, you will loose all your money in 50 days.

What if your first investment (1x or $1000) is washed away?
Who cares. You only lost 1x or $1000 out of 10x or $10000, which you were anyway ready to loose comfortably. Loss of 10% of that never pinches you. Does it?

When you loose take a few days of trading holiday. Evaluate your previous trades. Learn from your mistakes. Invest your next 10% or 1x or $1000. You learn to trade comfortably with out tension. You never go out of business. Good money management saves you from bankruptcy.

What if you do not have enough affordable money?
Take a day job. Save enough. Learn. Follow money management. Start trading.
But...Never ever borrow money.

Your borrowed money is not your affordable money. It puts you under tension. Your tense mind cannot follow a set path. Emotional mind makes instant decision and breaks the first rule of successful trading, that is, to follow a set of predetermined actions based on your research.

As you continue trading and continue to make profit, keep transferring half of your profits to your bank account. Both your trading account and bank account will be growing.

What to do with the profits transferred to bank account?
Good question. Get yourself and your family a nice gift. Spend. Enjoy. After all why do you earn? Learn to enjoy your life as you go along. Look for other best ways to invest money.

Money management helps keep your trading account as well as your life account healthy.

Manage your money. Manage your life.