What Is Stock Trading? 10 Essential Principles Every New Investor Should Know

What is stock trading? Simply put, it is an investment method involving buying and selling shares of companies. But to do this well, you not only need to understand the theory but also gain practical experience. Here are 10 key principles that anyone entering the stock market should know.

Step 1: Define Your Investment Roadmap

Before trading stocks, you need to decide your path. There are two main directions:

Short-term Investment: Day trading, based on technical analysis to catch quick price movements. Requires high skills, multi-disciplinary knowledge, and continuous market monitoring.

Long-term Investment: Buying and holding quality stocks over years. This approach requires strong fundamental analysis skills but involves less daily monitoring pressure.

Each approach has different strategies. Clearly identifying which path you want to follow will help you choose the right tools and skills.

Step 2: Build a Diversified Portfolio

One secret of successful investors is never putting all eggs in one basket. Warren Buffett also always advises this.

Diversifying your portfolio means:

• Buying stocks from many different companies
• Choosing from various industries
• If possible, combining multiple asset types (stocks, forex, commodities)

Market indices like S&P 500 or VN30 are typical examples of diversified portfolios. When the market declines, these indices usually fall less than holding a single stock. Buffett recommends long-term investors consider index investing for its efficiency and safety.

Step 3: Select Stocks with Strict Criteria

If you follow a long-term investment approach, choosing good stocks is the most important decision. Look for companies with:

• Strong financial health: Short-term asset ratio (Current assets/Short-term liabilities) above 1.5, not overly leveraged
• Sustainable growth: Revenue and profit increasing consistently over the past 5 years
• High profitability: Indicators like profit margin, ROE, ROA all growing annually
• Regular dividends: The company genuinely returns profits to shareholders
• Trustworthy leadership: No history of deception or hiding information

Top companies like Vicostone, Vingroup, Vinamilk over the past 10 years share common traits: large scale, high market share, and respected leadership. These good stocks may not yield high returns during market booms but serve as excellent defensive assets during downturns.

Step 4: Adjust Your Portfolio According to Market Cycles

The world changes, demands change, and markets change. Even if you are a long-term investor, you need to periodically review each stock’s performance and adjust weights.

For example, during the COVID-19 pandemic, central banks loosened monetary policy, making loans cheaper. Investors expected real estate demand to rise, so real estate stock prices increased accordingly. However, when tightening policies in 2022 reduced demand, stock prices fell. A savvy investor will immediately adjust portfolio weights.

Buffett is famous for long-term holding, but if you observe Berkshire’s portfolio, you’ll see stock weights change continuously each reporting period. The secret is not just holding long but knowing how to hold with appropriate weights.

Step 5: Risk Control as a Protective Barrier

For short-term traders, risk control is vital. Use protective orders:

Sell Stop Order: Automatically sell stocks when the price drops to your set level. Helps cut losses before they become too large.

Buy Stop Order: Automatically buy stocks when the price rises to your set level. Helps catch upward trends.

Golden rule: Place stop-loss points about 10-15% below your entry price. This ensures that when losses occur, they stay within your tolerance.

Step 6: Use Technical Analysis to Determine Timing

To find the optimal buy/sell points, use technical analysis. The two most popular indicators are:

RSI (Relative Strength Index):

• RSI below 30: Stock is oversold, potential buy signal
• RSI above 70: Stock is overbought, near peak

Stochastic Indicator:

• Above 80: Overbought, trend may reverse downward
• Below 20: Oversold, potential rebound

If you’re not proficient with these tools, you can use trading signals provided by analysts to make decisions.

Step 7: Catching the Bottom – Advanced but Risky

Catching the bottom means buying when prices are at their lowest, potentially generating huge profits. But it’s also the most high-risk technique.

Signs of a bottom:

• Prices form new lower lows, but momentum indicators (RSI, Stochastic) rise → selling momentum is weakening
• Prices start forming higher lows compared to previous lows → selling pressure decreases
• Trading volume spikes during declines → investors are bottom-fishing

Note: Use only a small portion of your capital for bottom-fishing. Don’t risk all your assets on this gamble. Avoid speculative stocks or those trading below par value, as they tend to fall sharply.

Step 8: Do Not Borrow Money to Trade Stocks

Borrowing to invest is a sure way to go bankrupt. In Vietnam, many scam companies use apps with interest rates up to 1000% per month to trap investors.

Only invest with idle cash—money you can lose without affecting your long-term life.

Instead, you can use margin wisely: it allows you to amplify profits without external debt. For example, with 1:20 margin, you only need (you can hold assets worth $2,000. In the worst case, you only lose your initial capital and won’t incur debt.

Step 9: Continuous Practice – The Key to Success

Warren Buffett has a golden rule: never lose money in investing. To do this, you must constantly learn, analyze stocks, and practice.

The best way is to start with a demo account, trading with virtual money to accumulate experience without risk. Through this process, you will better understand the market, develop analytical skills, and build trading discipline.

Step 10: Maintain Stable Psychology – The Foundation of Everything

The stock market is volatile. A large profit can turn into a loss in 1-2 days. You need a strong mindset.

Happiness and fear are enemies: Don’t panic and cut losses too quickly. Don’t hold on too long out of greed. Analyze the reasons behind market swings, then make rational decisions.

Successful investors are not always right but are those who control their emotions and stick to their strategies.

Conclusion

Stock trading is a skill that can be learned. It requires patience, discipline, mental resilience, and continuous learning. The principles above will serve as a foundation to help you build a sustainable and profitable investment journey in the stock market.