ABCs and 123s of Investing in the Stock Market

In an earlier post (Beginner’s Guide: How to Start Investing) we’ve discussed the basic things to get yourself familiar with about how to jumpstart your efforts in investing.

Let’s take a recap:

Step 1: Get Your Finances In Order

Step 2: Learn The Basics

Step 3: Set Goals

Step 4: Determine Your Risk Tolerance

Step 5: Find Your Investing Style

Step 6: Learn The Costs

Step 7: Find A Broker Or Advisor

Step 8: Choose Investments

Step 9: Keep Emotions At Bay

Step 10: Review and Adjust
In this series, we collated basic tips from seasoned investors around the world. Take your time and read all these. If you want to be an investing ninja, further reading is also required.

  1. Sell your losers and let your winners run. When a stock is going up, then it doing what you as an investor is expecting. But when it is going down, that is not what you want to see. Sell it. Do not sell stocks that are going up.
  2. Never buy a stock just because it has a low price. Buy stocks that you think will go up. For example, own 200 shares of a $20 stock that has earnings behind it, than 2000 shares of a $2 stock that has nothing but a story behind it. Investing is different from gambling, although both are risky.
  3. It is better to average up than to average down. Stocks go down for a reason. If you buy a stock and it goes down, don’t buy more. If you have a stock that is going up, then buy more of it.
  4. Buy when the people that “know,” buy. If the officers and/or directors of a company are making purchases of the company stock in the open market, that is a good sign. As insiders, they clearly see the future of company stock, be watchful of these kinds of signs.
  5. Buy…Sell Higher. Buy low, sell high isn’t working anymore. You don’t have to buy low. You just have to buy stocks that you think will be going up.
  6. Watch the trend. Stocks tend to move in groups. “Don’t have to look for a star in a sector devoid of other bright lights. When possible, find your stars in clusters of other stars. It could make for a longer, straighter ride”.
  7. Only use margin if you understand what it is and can afford to lose more than you invest. Margin is borrowing money to buy more securities.The amount of money you make in the market is predicated NOT on how many shares you own. So, make sure you know how much money you have at risk.
  8. Stocks that split can offer great opportunities. Opportunities are sometimes found with stocks that announce a dividend increase along with the split. Sometimes after a split, a stock will come down a little because of a run up in price caused by the announcement.
  9. Buy a Winner, Own a Winner. Buying companies that consistently do well is a good concept.You don’t have to find an undiscovered stock to do well. Although you may try… at your risk.
  10. Buy on rumor. Sell on News. A rumor has some facts to it. Perhaps a company insider leaked a vial information that might inform your investment decision. So, buy the stocks. If the rumor seems untrue after all, pick your right time to sell and SELL.
  11. Don’t take tips from your neighbor. Most likely your neighbor is just repeating something he heard from someone else. Do your own research, or use a professional. Unless your neighbor is a professional investor.
  12. Look around you before you invest. A great way to invest is to look for companies you know or do business with. Look around and you might come up with a great investing idea.
  13. Diversification can save your life…your investment life that is. Don’t put all the eggs in one basket. You’ll lose all of them is you trip. Don’t put so much money in one stock that if it doesn’t work out it will change your lifestyle for the worse.
  14. Over diversification can give you a false sense of security. Most people don’t need to own more than 4 or 5 mutual funds to have maximum diversification. If you invest in multiple mutual funds of the same type, large cap growth for an example, you will find they will own many of the same issues. That is duplication, not diversification.
  15. Act, and act quickly. Don’t inquire about other stocks or ask how the family is doing. If you make a buying or selling decision, do your business so you don’t miss your price. Sometimes stock prices change quickly. Ask your other questions after you have made your trade(s).
  16. Limit your limit orders. Putting in a limit order to buy could cause you not to get an execution on a stock that you like and is moving up. If you want to invest in a company, invest in that company, don’t leave it to chance.
  17. If you are an investor, don’t over trade. If you buy a stock for a reason and the reason does not change and there are no mitigating factors. Hold the stock. Remember, let your winners ride and sell your losers.
  18. Don’t give stop orders that are too tight. If a stock has a normal trading swing of 1 ½ points in a day, don’t put in an order to sell if your stock drops 1 point from where you bought it. You could get “stopped out,” not because of a drop in the stock price, which was caused by something extraordinary, but because of the normal price gyrations of the stock.
  19. Consider buying when there is blood in the streets. Economic cycle: the stock market goes down, up, and down, and up again. When the market has been slaughtered there are always opportunities for it to go back up. Be vigilant.
  20. Marry your wife (or husband), don’t marry a stock. Many people get caught up in one or two stocks or one or two industries and hold them forever, even if they are holding on for dear life. There are stocks that go down a lot and never come back. Divorce them.
  21. Don’t be penny wise and dollar foolish. You will often get messages offering you financial advice, that’s true, that happens. If you are taking advice, concern yourself with more than the commission or the fee.
  22. Beware the Hustler. There are three types of people in the investment business. There are those that hurt you because that is what they do for a living. There are those that can hurt you because they don’t know any better, they just don’t know what they are doing. Then there is the third group, the group of financial professionals who truly can help you.
  23. Remember that analyst estimates are just that: estimates. Companies may earn significantly more or less than analysts believe they will. It is more important to watch the stock price performance heading into an earnings announcement than to focus on what analysts are saying. You will often see a stock’s price run up significantly BEFORE the company announces better than expected earnings.
  24. Buying options is a speculation, not an investment. When you buy an option you have to be right about both the move in the underlying security as well as the timing. This is why eighty percent of options expire worthless.
  25. Find your comfort level. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach. We’ve mentioned that there are two investment style: the conservative and aggressive investment style. If you are not comfortable with your current portfolio or investment style, take a more conservative position.

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