The biggest piece of advice on stock trading for entrepreneurs boils down to one word—diversification.
This diversification strategy is helped even further with low beta stocks which are described here. The trap that many entrepreneurs fall into is oftentimes putting all of their financial capital into one basket of their own company. This is often a high risk, high reward proposition. If possible, developing a few ideas can give you a softer landing spot if your main idea fails.
Here is a look at a portfolio of ideas and technology products that is well diversified. This is good to have from an ideas perspective, but it is also advisable to get asset class diversified as well when you are looking to build an investment portfolio.
In general, it is advisable to invest more conservatively outside of your own business so that you aren’t putting too much risk on your own personal balance sheet.
Again, an entrepreneur’s high-risk tolerance is a big factor in success. However, downside protection and properly hedging that risk from a personal finance perspective is incredibly important. No one should have to lose their own business and have nothing to fall back on if they fail.
The other stock trading tip is to stay liquid. Don’t get too much money tied up in long-term investments that aren’t likely to pay off in the near term.
The goal is that you should always be able to get out of your investments if you need a cash infusion into your business or personal life. This means being prudent when looking at the trade-off between long-term returns and short term liquidity.
Long-term CDs are very attractive investments from a rate of return perspective, but it is also important to consider whether having that cash tied up over the long-term will hurt your liquidity. The goal is to never overextend yourself so that you have to sacrifice your primary business success.
The investment tips that are elaborated upon in this article is worth reading for more information. There is a multitude of asset classes that investors can focus on analyzing, but the three to focus on to properly diversify when trading are equities, fixed income, and commodities.
Equities trading has the highest risk-reward ratio so entrepreneurs will likely find this asset class to be attractive. The biggest factor to keep in mind when trading equities is that you have no recourse in the event of a bankruptcy of a publicly-traded company. The downside is that you could lose your entire investment if the company that you are investing in becomes unprofitable.
This is where fixed-income trading fits nicely into the equation. As a fixed income trader or investor, you are able to get a steady income from your investment in the form of interest payments. These interest payments are generally made quarterly, semiannually, or annually and allow you to get a steady income stream in a diversified fashion.
With these investments, you are essentially loaning a public company money that they can then use for their own capital investments or funding acquisitions. In this way, fixed income investing is a win-win scenario for the public company and you as an individual investor. You get a steady stream of income as an investor with very little risk and at the end of the loan term, you get your principal back completely. The public company that loans the money gets to use your money to drive a return that is significantly greater than the interest rate that they are paying.
Diversification is probably best exemplified when you are looking to buy stocks that are commodities based. Gold is the biggest form of commodity hedging because when inflation is high, everything loses value except for gold. Trading stocks that have value that is derived on a scarce resource will always help you diversify your investments.
The downside is that you aren’t investing or trading in stocks that have innovative, game-changing technology. This means that the return and upside may be limited in comparison to your business capital investments. However, you can’t aim for a home run every time at bat.
In stock trading, singles, doubles, and even walks are important. Avoiding the strikeout is really the name of the game.