vengabeats
Nilesh Nagdev
Many investing websites have hot stock picks and tips - most of which never pan out. Problem is, stock picks aren't what makes you a successful investor. They key to making money in the long run is understanding the fundamental principles of investing.
1) Use the Stop Loss order - Stop loss orders are so simple, yet seemingly undiscovered in the investing world. A common rule of thumb is setting a stop loss order for 15% below the price at which you bought. Keep in mind this percentage can vary depending on both market conditions and your investing style, the point is to limit your losses on any particular stock.
2) Sell the losers and let the winners ride! - It is human nature to make this mistake. Time and time again, investors take profits by selling their appreciated investments, but, in hopes of a rebound, hold onto stocks which have declined. Usually the stock, then, becomes too worthless to bother selling. Ask yourself: "why would I want to keep a bad investment, but get rid of a good one?"
3) Never invest on tips - Whether the tip comes from your brother, cousin, neighbor, or even broker, nothing is ever for sure. Do your own research and analysis of any company before even considering investing your hard earned money on a tip.
4) Most mutual funds don't perform - Because some of them are worthwhile investments (especially for those with no time or desire to manage their own money), we don't want to bash all mutual funds . The truth is, however, that over 70% of mutual funds fail to beat or meet market averages such as the S&P 500.
5) Stop worrying about the 1/8th - If you are a small investor (under $2500 per trade) then you are better off using a market order. A true long term investor looks at the big picture and does not worry about the 1/8th or 1/16th of a point you might gain on the limit order . *Editors note: since the writing of this article, decimalization has made fractions extinct. The point remains, don't worry about the small stuff when investing for the long-term.
6) Pay little attention to the P/E ratio - A low P/E ratio doesn't necessarily mean a security is undervalued. It could mean the company's earnings are flat or slowing. The P/E Ratio is useful only to compare companies in the same industry or in the market in general. For more on how to use the P/E ratio correctly, see our tutorial on the subject.
7) Don't try to "time the market" - Trying to detect when the market is going to move up or down isn't only hard, but impossible. Don't even try. If people could time the market, we'd all be wasting away in Margaritaville with a drink in each hand! This is not to say, however, that utilizing technology to assess trends is not in order. Large brokerage houses have sophisticated computer-based algorithms with which they attempt to technically analyze the market. Just as daily cost averaging, over sufficient time, will accrue gains, so will a disciplined, systematic approach by the individual investor. Stock trading programs are evolving, and will assist the individual investor to organize and systematize his or her trading habits. However, keep in mind that there is no "holy grail."
8) Waiting for the market to correct - Believing that the market is overvalued and waiting for stock prices to correct before investing will often get a long-term investor in trouble. According to the laws of compounding, the earlier you invest, the higher the return. If you have the money now, for goodness sake, invest it before it ends up going towards unplanned expenses.
9) 401ks are free money - Never give up the chance for matching your employer sponsored savings. Invest $1000 a year, and with your employers contribution of $1000/yr and you are already up 100%. ( 401ks are American, but most countries have similar employer sponsored retirement investment plans).
10) Price is irrelevant - Just because a stock is trading at $100 or higher has no relevance to future performance. Never avoid buying a stock because you think it is too expensive and can only afford 10 or 20 shares. For example, one of the most successful companies in history is Berkshire Hathaway. It trades in the thousands of dollars because they've never done a stock split . If you had avoided buying this stock back when it was at a seemingly "expensive" $1000, you would of missed out on big gains.
These tips are by no means the only way to make money in the market. They are, however, ten pieces of solid advice that will help you come out on top in the long run.
1) Use the Stop Loss order - Stop loss orders are so simple, yet seemingly undiscovered in the investing world. A common rule of thumb is setting a stop loss order for 15% below the price at which you bought. Keep in mind this percentage can vary depending on both market conditions and your investing style, the point is to limit your losses on any particular stock.
2) Sell the losers and let the winners ride! - It is human nature to make this mistake. Time and time again, investors take profits by selling their appreciated investments, but, in hopes of a rebound, hold onto stocks which have declined. Usually the stock, then, becomes too worthless to bother selling. Ask yourself: "why would I want to keep a bad investment, but get rid of a good one?"
3) Never invest on tips - Whether the tip comes from your brother, cousin, neighbor, or even broker, nothing is ever for sure. Do your own research and analysis of any company before even considering investing your hard earned money on a tip.
4) Most mutual funds don't perform - Because some of them are worthwhile investments (especially for those with no time or desire to manage their own money), we don't want to bash all mutual funds . The truth is, however, that over 70% of mutual funds fail to beat or meet market averages such as the S&P 500.
5) Stop worrying about the 1/8th - If you are a small investor (under $2500 per trade) then you are better off using a market order. A true long term investor looks at the big picture and does not worry about the 1/8th or 1/16th of a point you might gain on the limit order . *Editors note: since the writing of this article, decimalization has made fractions extinct. The point remains, don't worry about the small stuff when investing for the long-term.
6) Pay little attention to the P/E ratio - A low P/E ratio doesn't necessarily mean a security is undervalued. It could mean the company's earnings are flat or slowing. The P/E Ratio is useful only to compare companies in the same industry or in the market in general. For more on how to use the P/E ratio correctly, see our tutorial on the subject.
7) Don't try to "time the market" - Trying to detect when the market is going to move up or down isn't only hard, but impossible. Don't even try. If people could time the market, we'd all be wasting away in Margaritaville with a drink in each hand! This is not to say, however, that utilizing technology to assess trends is not in order. Large brokerage houses have sophisticated computer-based algorithms with which they attempt to technically analyze the market. Just as daily cost averaging, over sufficient time, will accrue gains, so will a disciplined, systematic approach by the individual investor. Stock trading programs are evolving, and will assist the individual investor to organize and systematize his or her trading habits. However, keep in mind that there is no "holy grail."
8) Waiting for the market to correct - Believing that the market is overvalued and waiting for stock prices to correct before investing will often get a long-term investor in trouble. According to the laws of compounding, the earlier you invest, the higher the return. If you have the money now, for goodness sake, invest it before it ends up going towards unplanned expenses.
9) 401ks are free money - Never give up the chance for matching your employer sponsored savings. Invest $1000 a year, and with your employers contribution of $1000/yr and you are already up 100%. ( 401ks are American, but most countries have similar employer sponsored retirement investment plans).
10) Price is irrelevant - Just because a stock is trading at $100 or higher has no relevance to future performance. Never avoid buying a stock because you think it is too expensive and can only afford 10 or 20 shares. For example, one of the most successful companies in history is Berkshire Hathaway. It trades in the thousands of dollars because they've never done a stock split . If you had avoided buying this stock back when it was at a seemingly "expensive" $1000, you would of missed out on big gains.
These tips are by no means the only way to make money in the market. They are, however, ten pieces of solid advice that will help you come out on top in the long run.
