Top 10 Stock Market Tips

The 10 Most Important Tips for Investing in Small Stocks

Piggy bank with coins
Piggy bank with stacked coins. KTS Design

Make sure your investments turn a profit.  These 10 tips will ensure the greatest results for you in your stock market trading. This is NOT investment advice, it is opinion only.

1. Caution Trumps Action:

It all starts before you put a single penny at risk.  I always explain that getting a great buy price is much more important than getting a good sell price.  Be extra demanding (some would call it "extra cautious"), both with your decision on which stock market investment you buy, as well as with the price you pay.

Remember, even if your low-ball offer doesn't get filled, you still have the cash to try again another day, or at a different price.

2.  The Horse Goes First:

We're probably putting the cart before the horse here, considering that we're already speaking of buying and selling stocks.  Before you do any of that, you should have proven the success of your strategies by Paper Trading.  That way, you learn everything you need to learn before you risk even a single penny.

3.  Limit Your Market Orders:

Always buy and sell with LIMIT orders, rather than MARKET orders.  Limit means you dictate the price at which the trade may (or may not) take place.  Market means you are just taking the current price, whatever that may, for better or worse.

Talk to your broker before you make any type of trade.  Market orders can be excessively costly when trading thinly traded penny stocks, because your trade order may overwhelm the supply of shares, causing you to pay much more for the investment than you had intended.

4.  Stop Your Losses:

Consider using stop-loss orders.  When the shares you just bought drop a certain percentage, you may want to just take the loss by liquidating them immediately.  This practice can often limit your downside to a small 5% or 8% (for example) of your total investment.

5.  Size Your Positions:

Position sizing is the most misunderstood of all the most important concepts.

 We are forced to simplify the theory here, but there are entire books based on just this one aspect of investing alone.  Keep total trades to a manageable portion of your portfolio, for example 5%, assuming your total investments are significant enough for such a strategy.  Position sizing to insulate you against catastrophic losses, and should be re-calibrated to fit your portfolio as the underlying stocks change in value.

Hey, we told you, there are entire books on the subject.  We can't get much more into position sizing here, but we do suggest serious investors take the step to learn more.

6.  Emotional Investors Go Broke Fast:

Nothing will liquidate your holdings faster than losing control of your emotions!  Here's the main ones to keep leashed.

7.  The Faster Something Rises...

Peel off a little profit when you get the really quick gains.  Other shareholders will be doing the same thing, which typically causes the shares to start coming back down to earth.

8. The Boring Part:

Diversify... yes, I said the most boring word in the world.  Yet, you should spread your investments around, since anything can happen at any time.  

A good diversification strategy involves spreading your holdings between the nations in which the companies are headquartered, the prices per share, the markets they trade upon, the types of businesses, even the number of employees.

 In short, diversification (done properly) can involve any aspect of the underlying investments.

9. Where the Best Gather:

Trust in the higher caliber stock exchanges.  If you buy shares on the shady markets, you are dramatically more likely to get lower-quality investments.  

Most of the shares on the best markets (Bulletin Board, NYSE, NASDAQ, AMEX) had to meet many requirements to gain their listing in the first place, and also typically do a much better job of relaying information to their shareholders.

10.  Crime Scene:

Even more than the stock price activity, keep an eye on trading volume.  This will tell you much more about the future direction of the shares than just glancing at the price action.

 

You wouldn't investigate a crime by just looking at the ceiling, so why ignore the most telling clues which are available across the bottom of the trading chart?

These 10 tips will help you invest very well.  You still need a willingness to learn, and will have to take total responsibility for every trading decision you make, but that is exactly the path to wealth from stocks.  There is no other.