Separate Your Speculation Account from your Investing Account
First of all, in speculating, you are looking to profit from the short or midterm fluctuations of market value of stocks. This time frame can range from less than a day to a couple months. On some occasions you may be able to consider a time span of one to two years as speculative. Where as in investing you are looking at the business as a whole and determining a value of that business. Through the speculation model, whether or not a business is overvalued is of little concern. You are more concerned with whether or not someone else will pay a higher price for that stock.
Track the Performance of Each Trading Strategy
The first reason you should keep your speculation money separate from your investing account is because you'd want to track the performance of each methodology. Keeping both types of money in the same account purely because of trading commissions is not a good decision. You'll end up paying more in investment and speculating losses than you will with trading commissions. Figure out if you better at speculating or are you better at investing. Then do more of what you are good at and less of what you are not good at.
Keep the Two Strategies Independent of Each Other
The second reason separating speculation money from your investing money is an intelligent decision is if you start trading the same stocks in varying time frames you could lose track of what stocks you are employing which strategy. Yes, you could track your stocks on Microsoft Excel. But if you are trading short time frames, you will be looking at stock charts differently from if you are looking at a stocks from a longer point of view. In the short term, your chart reading skills may suggest there will be further correction as the chart looks overextended. But in the longer term, you still believe the stock will continue to increase in price. If you are unable to separate these two ideas, you may end up selling a long term investing stock early because you were spooked by the short term price action.
Clearly Prioritize Capital Withdrawals
The last reason for separating your investing money and your speculation money is should you need to withdraw money out of an account, you'll know to pull from the speculation money first versus the investing. While you should never risk more than you are willing to lose, there will undoubtedly be life events that arise whereby you may need to pull money out of your accounts. Because your speculation money trades under a shorter time frame, you'll also be able to more accurately time the exit of your stocks with the short-term peaks. In investing, there may be years that go by and your stock doesn't get back to the price you paid it at. If that is the case, you'd have to be comfortable with taking a loss even through your theory about the business has not been unproven.
Labels: Finances, Pro Stock Trading Tips