If you are an individual stock trader or are thinking about getting into the stock market for your own personal investment, you may sometimes question your decisions or wonder just what you are getting into. Use these Ten Commandments for Stock Trading to help guide you so you know you are making good decisions and to help take the fear out of stock trading.
Commandment One: Make Rules for Buying and Selling
In order for you to make a return on your investment, you must make rules for when you are going to buy and when you are going to sell. Buying and selling at the wrong times can cost you a fortune in fees and unrealized gains. Make sure you are comfortable with your rules. For example, your neighbor might feel the time to sell a stock is when it has increased in value by 45%. You might be more comfortable selling at a lower return.
Commandment Two: Find a Low-Fee Brokerage
Since this is your own hard-earned money you are dealing with and you are likely to do a fair number of trades, you do not want your investment to be diminished by fees. The best brokerages do not charge account opening fees or require you to maintain a specific balance to avoid a maintenance fee. Nor do they charge fees on a sliding scale based on how many shares you are buying and selling at a time.
Commandment Three: Research
Research the companies you are interested in buying. Do not buy the so-called "hot stock ready to explode upward" that you find advertised on a random fax left on your company's fax machine. Do not buy a stock because your accountant got a hot tip about a certain company. Do your own research. With the advent of the Internet, it is as easy as clicking the mouse a few times and you are privy to the financials of thousands of companies.
Commandment Four: Stay Away from Penny Stocks
Do not buy penny stocks. They are not an easy way to make money. Penny stocks are cheap for a reason and a whiff of bad news could plunge this stock into an irreversible downward spiral. In this case, cheap is not easy. Nor is it cheap.
Commandment Five: Stay Away from Trend Stocks
Every year, every quarter, some company will be touted as "the next Microsoft." But the problem is, by the time this news makes it to Wall Street, Elvis has already left the building. If you buy this stock when you hear about it, you are probably going to buy it at an inflated price, because every Tom, Dick and Harry is rushing out to invest in it, too. Then, when the price falls, every Tom, Dick and Harry will cash out so as not to lose their shirt and this stock will crash hard.
Commandment Six: Keep it Boring
Similar to not buying trend stocks, stay away from "exciting" stocks. Meanwhile, there are plenty of companies out there making widgets that the exciting companies buy. For example, if an airline is promoting a brand-new kind of super-bus type plane, invest in the company that makes the fuel tanks for planes instead. Boring companies that make parts for exciting companies tend to be less volatile and that can be great for your portfolio in the long run.
Commandment Seven: Buy Low, Sell High
Everybody knows this, but few follow this principle. Unless you're working off of inside information (which you shouldn't do anyway because it will land you in jail), you should never buy a stock when it is at its 52-week high. The odds of it going higher anytime soon are slim. However, if you buy a stock that is near its 52-week low, you at least know it is likely to go higher sometime in the future. Again, do your research to determine why the stock is low and if you feel comfortable, buy it. Then follow Commandment One and sell when your rules dictate that you should sell.
Commandment Eight: Do Not Time the Market
It has been said a million times over that you cannot time the market. This just means that you cannot predict when a stock will drop or zoom high. So you might as well buy when you see it low and sell when it goes high. Don't kick yourself if the stock drops more right after you buy or continues to climb after you sell. You've set your rules for buying and selling, you've stuck with them, and you've made your profit. That should be good enough to put a smile on your face.
Commandment Nine: Do Not Be Emotional
If you are following Commandment One, there should be no reason for you to buy or sell when you are emotional. It is easy enough to panic when a stock tanks and you will be inclined to sell. But remember, you do not lose money unless you sell for less than what you bought. It's all a bunch of numbers until you sell. Then it becomes money again. So, don't give in to fear and panic and sell low. And, if you followed Commandment Three, you will not be so emotional when a stock drops for no reason, because you have done your research and you will know that this too, shall pass.
Commandment Ten: Diversify
Diversify your portfolio over a number of market sectors. This way, if a particular sector is struggling because of bad news on Wall Street, your holdings in the other sectors will neutralize any temporary dips in the struggling sector. It is very difficult to not become emotional if you invest in only one sector and all the companies in that sector are losing value.
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