Everybody makes mistakes in the stock market, we all do. However, mistakes in the stock market can cost you a hell of a lot of money fairly quickly, which is why I have compiled a list of investing principles that investors may want to keep in mind at all times. I have done all the mistakes on this list myself, many numerous times, so learn from my mistakes, and save a LOT of money, nerves and time over the long haul.
If you want to navigate the tricky waters of the stock market successfully, here are 10 things investors must do:
1. Know What You Are Doing
This one sounds quite intuitive, but believe me, it isn’t. Too often investors rush to buy stocks when an analyst issues a “Buy” recommendation for a specific stock, hoping to make a quick buck. It is important that you know a thing or two about your future stock investments, so spend some time reading up on the company you are interested in. A good start: Buy stock in a company whose products you like and already know. Always do your own research and don’t buy a stock just because someone else, whether an analyst or an uncle, recommended it.
2. Only Invest Money That You Can Afford To Lose
Nothing worse in life than losing money you can’t afford to lose on a soured stock investment! Only invest money that you can afford to lose and that you don’t depend on. Don’t, for instance, speculate with your emergency fund or a down payment for a house.
Don’t put all eggs in one basket. If you put 100% of your funds into stock A and the company messes up, gets sued by a competitor, faces unfavorable regulation, goes out of business etc. you are in BIG trouble. Spread your risk and invest in many different companies that preferably operate in different industries.
4. Don’t Speculate
They majority of stock “investors” out there are not really investors, but speculators. They hope to make a quick buck on stock price movements, which is entirely speculative. Investing, on the other hand, requires you to do your homework and look into the company you are interested in from a fundamental value point of view.
5.Keep Your Emotions In Check
This one is a big one, and probably the single biggest reason why most investors are not successful in the stock market over the long haul. Our emotions play tricks on us all the time, and that’s especially true if you have money on the line and the stock market goes on a roller coaster ride.
I HIGHLY recommend you to read Benjamin Graham’s book “The Intelligent Investor”, especially chapter 8 and 20. Warren Buffett also highly recommends these chapters for both professional and novice investors. Reading this book with an open mind can save you a lot of money in the long run. A very good and insightful read.
6. Don’t Panic
Never ever panic when it comes to stock investments. The stock market sometimes makes crazy swings which can put investors’ nerves to the test. The cardinal rule here is to never make a decision when you feel panic overtaking you. Doing nothing is often the best investment strategy.
7. Pick Quality Dividend-Paying Stocks
There are lots of different investment strategies investors can choose from: Growth investing, value investing, high-yield investing etc. Everyone can find a strategy that meets his or her investment objectives and constraints. I, for instance, follow a dividend growth strategy, meaning I invest almost entirely into companies that have a history of growing their earnings, cash flow and dividends throughout the business cycle, which greatly lowers my investment risk.
8. Don’t Follow The Herd
There is a LOT of group thinks at work in the stock market. When lots of people buy a certain stock and the price rises, others jump on board hoping to profit as well. Being contrarian and having your own thoughts and ideas will help you a lot in the stock market. Don’t mindless follow others just because you have heard they are buying a certain stock. Again, do your own research.
9. Stay Humble
You might have a good streak of making successful stock investments, and that’s great! Maybe you bought the dip in the stock market, and the market bounces back, dealing you a handfull of easy profits. Don’t get carried away here! Good on you that you made some profits fast, but don’t extrapolate and delude yourself into thinking that you have got it figured out and that every trade from now on will be lucrative. You will have losses. Everybody has. Be prepared for it and deal with it in a professional manner.
10. Use Stop Loss Protections
Stop loss orders are orders that can save your butt if the market or a stock unexpectedly drops fast. A stop loss order is an order that automatically closes your position if the stock price falls below a predetermined price. Say you buy stock A at $10 and put it in a stop loss order at $9. This means that should the price of stock A indeed drop to $9, your broker will automatically sell the stock. The purpose of a stop loss order is to limit your losses and protect you against a sudden burst in volatility.
If you make some of those mistakes, there is no reason for despair. I have made all of the mistakes listed here, many of them more than just once. The important thing is that you learn. Investing is a marathon, not a sprint! Good luck!