The Successful Trader's Guide to Money Management

CHAPTER 9Money Management When Trading Stocks

Until now, we've focused on trading futures. These instruments are often erroneously considered risky, but the real risk is not knowing them, and therefore not being able to assess the risks. If you know the risks, and take steps to keep them under control, derivatives are nothing more nor less than simple trading instruments.

In any case, what we've discussed up to this point also applies to other trading instruments, and in particular to the stock market, which remains as always the most popular and populated trading market in the world.

9.1 Trading in the Stock Market

When choosing a market to trade on a trader should consider all the pros and cons, and know what sort of limits they might encounter. In the case of the futures' market, often there are limits in terms of the margins required to trade with a certain instrument, and if the available capital isn't enough to cover these margins trading will be blocked. On the stock market we could say this limit is all but nonexistent: you can buy as many shares as you want and therefore size the trade you're entering in a way that doesn't create obstacles (unless, of course, the price of the share chosen is already higher than the capital in your trading account).

In many cases, you can also trade using leverage; in other words, buy (or sell) more stocks than you could with the capital in your account. There are, of course, a series of limits to be observed, but this option can ...