Having blind faith in stock and investing in it without knowing the lesser-known golden rules of stock investing can leave you in a lurch when the market throws some challenges at you. There are many golden rules that stock investors should follow to get an edge over their competitors, to be able to grow their portfolios. And one such rule is to invest for the long-term & reap the benefits later on. However, there are more rules that go along with the previous one. Check them out below!
I had a lengthy conversation with an individual that has a lot of experience in stocks, and he made some mistakes along the way. When asked about the golden rules of stock investing to follow, here is what he had to say.
Golden Rule Number 1: Never Lose Money.
Pretty straightforward right? Our first rule of stock investing comes straight from the great mind of the oracle of Omaha himself, billionaire Warren Buffett.
In fact, the way he said it "rule number one is to never lose money", "rule number two is to never forget rule number one", and it isn't that just some timeless advice I mean think of it.
Why would you lose money when the very point of investing is to grow it? but do not get it twisted.
It is certainly hard not to lose money, especially on the stock market what Mr. Buffett actually means by all of this is do not get blindsided by what your investment could potentially yield, you need to evaluate the risks too.
Basically, if the potential rewards do not outweigh the risks, your investment may not be worth it, and just to mention this perhaps explains why many investors today are avoiding long-term bonds like the plague.
Golden Rule Number 2: Start Small And Think Big.
You might have heard this one a few too many times but "big things start from small beginnings". So here is what this is all about in case you're wondering.
When it comes to stock investing, the trick is to start small. You must first test out the waters so start by directing a small fraction of your savings or monthly income, whether it is one hundred dollars, five hundred dollars, or even one thousand dollars to the market.
Besides this, it would be best if you took the time to learn about the companies you want to invest in. Again, start small until you're good enough at identifying the best companies to buy shares in, and ultimately you will develop an excellent trading strategy that will ensure that you make it big in the stock market.
Golden Rule Number 3: Think Like An Owner.
Another important rule to heed when investing in the stock market is always treating your stocks as businesses and come to think of it there is a good point here.
Many people view stocks as some sort of gamble forgetting that real businesses are behind them. At the end of the day, stocks give you fractional ownership of a particular company so you need to start thinking like a part-owner of the business that you're investing in, and that is actually how you make profits when the business performs well and vice versa.
So what is thinking like an owner all about? You need to analyze fundamentals valuation and get an opinion about how the business will perform in the future. Do not forget to go for companies with excellent management teams, shareholder interests at heart, and excellent financial and competitive positions.
Golden Rule Number 4: Invest Only In Businesses That You Understand.
At the risk of repeating what we said in golden rule number three, "you are not investing in a stock but rather the business behind it". So what does that mean? Well, before investing in a company, understand how it makes money, its strengths, and even the risks it is facing.
If you do not understand the business, you need to do one simple thing, let go. The word is that Warren Buffett had an opportunity to invest in Google before they came out with an IPO, and he let it pass. His reasoning was that he just could not wrap his head around how the search engine could make money, and that decision obviously cost him a lot of money given what Google is today.
Alphabet inc, Google's parent company is now valued at 1.474 trillion dollars, but all the same, we should not forget that this technique actually saved him from far greater losses over the years.
So from now on, you actually want to apply this to all of your investments. For instance, if you have no clue about how tesla works, just stay away from it.
Golden Rule Number 5: Do Not Try To Time The Market.
Ask any investment expert and you will learn that while you might have an excellent idea of the right valuation and price level of a stock, you should always refrain from trying to time when the market values it correctly, and here is why you cannot do that because it is quite challenging to predict when a share will hit its peak or its bottom.
And at the time of writing this article, no one has managed to time the market despite checking multiple market cycles.
Golden Rule Number 6: Be Disciplined.
There is a lot of discipline involved in successful stock investing. After developing an investment strategy and identifying a stock worth purchasing, stick to them. After deciding on a target price and a stop loss what do you do again, that is right stick to it and stick to your plan on how much to invest and at what pace as well.
Now there's no denying that with money on the line your emotions will undoubtedly race. When the market turns volatile and when that happens it can be hard to stick to your plan but all the same you want to stick to the plan you forged with a calm mind.
Golden Rule Number 7: Always Invest Only Excess Cash.
Never invest all of your money in the stock market and let me tell you why the market is always volatile meaning you're always in danger of losing money that's why you only need to lose the extra cash you have instead of the cash you need for everyday survival.
The significance of budgeting and planning your investment cannot be overstated.
Golden Rule Number 8: Keep Tabs On Trends.
The last thing you want to do is invest in the stock market and just let it be. You need to be tracking your investments from time to time because it is the only way to get wind of changes in the worldwide market that could mean trouble for your profits.
But what if you cannot do it all on your own? well, you can always hire a professional and then provide them with specifications on how to manage your portfolio.
Golden Rule Number 9: Diversify Your Portfolio.
Do not put all your eggs in one basket. That is an everyday adage that investors use and they use it for a good reason.
You need to diversify your portfolio to minimize the risk of losing your money. Exactly how do you do it? it is simple by investing in both assets and instruments, for example, you could purchase an index fund like the sp500 and add a bond to your portfolio or invest in a real estate fund.
Golden Rule Number 10: Buy And Go Long.
Ever heard of the buy and hold strategy? well, that is the best way to invest in the stock market and it is essentially about buying some shares and holding them until you realize your target profit.
Okay, let's go a little bit deeper here. So how long should you hold your shares to make money investing? well, it all comes down to your tp which is essentially your target profit or target period.
Basically, if your target profit is 10, close your trade when you realize that profit, and likewise if your target period is one month and you see some earnings already, close your position and find another great opportunity.
Golden Rule Number 11: Buy When Everyone Is Fearful.
Most investors will often sell or stop paying attention to the market when it takes a nosedive but does not follow suit because that's when the bargains are out there in droves.
That's right! the stock market is literally the only market when things are on sale that people are too scared to purchase. It is no wonder that Warren Buffett once said "Be fearful when the others are greedy and greedy when the others are fearful".
Luckily, if you're a 401k investor once you set up your account you do not have to do anything else to continue buying. It is an excellent way to leave your emotions out of the process.
Golden Rule Number 12: Be Objective.
It is so easy to have a best-case scenario in mind when investing in the stock market. However, when you set your eyes on the best, your decisions must be geared toward an objective assessment of the investment opportunities presented to you.
Essentially, all of your moves need to be guided by realistic expectations of returns not whatever excellent results you're hoping for.
Golden Rule Number 13: Lock In Profit.
Often locking your profit from time to time is another golden rule of investing because it enables you to earn a regular income. We've said this before but the stock market is always moving up and down, so it makes sense to have some money to trade actively and to realize some profit from time to time.
Do not rule out shorting you can also profit from falling markets.
Golden Rule Number 14: Run Profits Not Losses.
Have a trade that could be more profitable. Well, just let it be equally profitable. If a trade is going wrong why watch it get worse? Recovering losses is even harder than you may think.
Golden Rule Number 15: Learn From Your Mistakes.
Our final golden rule of stock investing is to learn from your past mishaps continuously. What does that mean? basically, always have a record of wins and losses because it goes a long way in helping you avoid trip-ups in the future.
Final Takeaway: Golden Rules Of Stock Investing
If you stuck to the end with us, we of course have one more bonus golden rule for aspiring investors out there, and that is to stay grounded. That's right! when it comes to stock investing, the importance of keeping your feet on the ground cannot be overstated, granted you might have some good streaks just don't let them go to your head. There you have it our list of 15 golden rules of stock investing. But this list has us curious. What's the most valuable rule you've learned in stock investing? we would love to hear from each and every one of you. So please drop your views in the comments.
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