Question:
Hi, I’m Alan. I’m a 30-year old Assistant Manager who earns RM 5,000 a month. My colleague reckons that I should learn how to do stock trading as a means for me to earn additional income. He reveals that he now earns as much as his take home pay from stock trading activities. So, should I learn how to trade stocks?
Answer:
Here, I’ll share 4 considerations to help you decide if this is worthwhile for you.
#1: Time
If you are new to stock trading, it is better to start by learning how to trade first before making your first trade. This involves a study on technical analysis which basically, is the study of stock price patterns and technical tools to guide you to make profitable trades via timing your entry into and exit from the market.
To name a few, the tools include the simple moving average (SMA), exponential moving average (EMA), relative strength index (RSI), stochastic, oscillators, MAC -D, Volume Weighted Moving Average and the list goes on. It is possible for you to feel a little overwhelmed with the tools introduced above for it is not exactly a walk in the park to study, learn and master them for most people. Thus, if you happen to be one who struggles to understand the above, don’t be too hard on yourself. It is no common knowledge.
Hence, depending on your level of intelligence and dedication, it could possibly take a few months (the fastest) or a few years (for most) to really learn, master, practise and fine-tune your stock trading skills. So, the question lies in yourself – ‘How passionate are you into learning how to do stock trading?’
#2: Profits
So, is learning about technical analysis helpful in guaranteeing my stock trading profits or at least, offer a guarantee in not losing my trading capital?
The answer is a nope.
Not even the best traders of the world can provide a guarantee on them.
Why? This is because trading losses is part and parcel of stock trading activities. The method of identifying good stock traders from the others which are not lies in two key metrics namely:
- Win-Loss Ratio. For instance, a stock trader has made 6 winning stock trades from his 10 most recent trades. Hence, his win-loss ratio is 60%. Hey, that is not too bad, right? Not exactly, which is why we look at the next metric:
- Gain per Winning Trade and Loss per Losing Trade. For instance, if the gains he made from his 6 winning trades has exceeded losses incurred from his losing trades, then, he is a good trader as he has a net trading gain. But, if the amount of gains he made from 6 winning trades is lesser than losses incurred from his 4 losing trades, then, he is a lousy trader as he has a net trading loss.
Stock trading is about probability and with that, the question is: ‘Are you willing to stomach occasional trading losses from stock trading activities?’
#3: Will You Up Your Trade?
Let’s say, after you have spent time and energy to acquire this skill and have the ability to earn RM 2,500 a month from RM 50,000 in trading capital where your transaction is RM 5,000 for each stock. My question is this: ‘If you are given RM 500,000 in trading capital, will you raise your trading amount to RM 50,000 into 1 stock for every transaction?
Perhaps, you may ask: ‘But, isn’t this risky? What if you’ve made a mistake from this trade? Would you stand to lose some trading gains which you’ve profited in your past 100, 200 or 500 trades?’
As such, let me ask you of this:
‘If you are 30 years old and let us imagine this … Will you be trading RM 5,000 a time into each stock in an attempt to flip it for a trading profit of RM 2,000, RM 3,000, or RM 5,000 when you hit 50, 55 or 60 years old? Is this what you want?’
Here, as you can see, you could feel like a hero initially when you are successful in doubling your capital from RM 5,000 to RM 10,000 in a short period of time. Some of you could even take RM 10,000 and try to double it to RM 20,000. But, even if you did so successfully, you could be reluctant in trading RM 20,000 and turn it into RM 40,000 due to fear of losing your initial trading profits.
Does this sound like one’s experiences in a casino?
But anyhow, if you are not willing to up your trade, you’ll remain a trader who’s just trading to make a few thousand bucks here and there for a lifetime, even if you are earning yourself 50%, 100% or 200+% in gains per winning trade simply because you do not have the volume.
#4: What Will I Do?
Let’s say, Alan and I make RM 5,000 a month from our day job.
Alan is committed to learn about stock trading at night and two years later, he’s able to earn RM 5,000 a month in trading income, boosting his monthly income to RM 10,000 a month.
I, on the other hand, choose to start a small part-time business. Two years later, I too am earning RM 5,000 a month from my part-time business, thus, boosting my monthly income to RM 10,000.
Is there a difference between the two?
Yes, there are many differences between the two and here is just one of them.
Let’s say, Alan and I walked into the bank to apply for a mortgage. How will the credit officer view us as potential borrowers, despite us earning RM 10,000 per month?
From the banker’s viewpoint, Alan’s income is still RM 5,000 a month as income from stock trading is not viewed to be a reliable source of income by the bank. I will qualify for a mortgage significantly higher than Alan for the bank views that I am earning RM 10,000 a month from both employment and business income.
Based on the bank’s acceptable debt-service ratio (DSR) of 60% and the Rule of 200, the extra RM 5,000 in monthly income is equivalent to having RM 600,000 in extra mortgages. The formula to calculate is as follows:
Extra Property Mortgage
= (Extra Monthly Income x Debt Service Ratio) x 200
= (RM 5,000 x 60%) x 200
= RM 600,000
In short, I will start a part-time business or will invest in learning to enhance my career to boost monthly income which are leverageable via mortgages that can be used to buy investment properties than learning how to do stock trading for the trading income earned is not leverageable.
Conclusion:
In short, while stock trading seems like a fast method to generate fast money, it could be a slow train to build wealth even if you have spent time and energy on learning how to do it. The better approach for Alan is to invest in himself if he is one who wants to increase his employment income. Otherwise, he should start by learning how to do business with opening up a small enterprise, which could be further expanded to something bigger in the future.
So, that’ll be my take. What’s yours? Please comment below:
