Investing in the stock market comes with its own set of risks and the potential for loss. However, if you do your homework and have clear goals, you can greatly improve your odds of success.
Here is our list of the top do's and don'ts of stock trading:
Fall in Love with One Stock
It can be tempting to commit to one stock or brand long term. Many new investors hold onto the first stock that made them a significant amount of money. Nevertheless, it is important to not lose your perspective. Be willing to sell a stock when the time is right. If you're not, you could lose your total investment.
Fail to Diversify
One key way to prevent losses is to diversify your portfolio. You can do this by adding multiple investments to your portfolio. This creates a more stable portfolio that protects you, because if one investment loses money, you still have equity in the others.
Trade Too Frequently
If you've done your research and believe in the stock you've purchased, you should not have to make trades more than a few times a quarter to keep your portfolio updated and strong. If you trade too often, you can chip away at potential returns and miss out on healthy growth for your investments.
Forget to Cap Your Losses
A stop-loss order is a new trader's secret weapon. However, many beginners don't know how to effectively use this important tool. A stop-loss order is a command, placed on your online trading platform or with a broker, to sell a stock when it reaches a certain price. This order prevents you from losing more money on a stock and takes the emotion out of the trade, since you determine the selling price at the outset.
Abandon Your Trading Plan
A sound trading strategy is one of the most important tools of a successful trader. To create your plan, assess your investment goals and timelines. Your goals, like saving for your child's college or your retirement, will impact the trades you make and the investments you pursue. Your timeline will also be a determining factor.
Finally, your tolerance for risk will shape your trading strategy. Risk tolerance is dependent on your ability to ride the ups and downs of the stock market without jeopardizing your financial well-being
Learn the Basics
Jumping headlong into trading without first doing your research is one of the quickest (and surest) ways to lose money. It is important to study the basics of the stock market before you begin. The stock market is very complex with lots of moving parts and ups and downs. In addition to understanding the workings of the stock market, start with the basics by learning the most common terms used by traders and what they mean.
Study the market and your trades. Finance websites like MSN and Yahoo Finance offer important details about seasonal trends and trade highs and lows for the last year. You can even go back further, seeing how a company has performed over several years and which way the graph is trending. While all of these steps may seem excessive, they are your best defense against loss. It's your money, and you do not want to lose it through faulty investments.
There are no absolute guarantees with the stock market. However, there are steps you can take to protect your investments and set yourself up for the best chances of success overall.