10 Stock Market Tips You Don’t Want To Forget

R egardless of how long you’ve been investing, learning other investors’ tips to stock market trading is an important part of development. Though experience is the best teacher, learning and harnessing the wisdom of others can help you gain valuable knowledge that equips you to become an effective trader.

Here are just a few of my favorite stock market tips to help you get started:

  • Establish long-term goals.
  • Remain objective.
  • Think through your parameters for buying and selling.
  • Choose companies, not stocks.
  • Evaluate your risk tolerance.
  • Take your time building positions.
  • Refrain from overactive trading.
  • Diversify your investments.
  • Avoid using leverage.
  • Track your investments.

10 Stock Market Tips and Tricks

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Whether you’re just starting to invest in stocks or you’ve been doing it for a while, learning effective strategies and tips for the stock market is essential if you want to be successful as a trader.

Establish Long-Term Goals

It’s essential that you consider your motivations for investing before you start your trading journey. Aside from thinking about how you plan to use your profits, you also need to know if and when you’ll need your cash back. By determining how much you’re hoping to make and when you’ll need it returned, you can:

  • Decide if the stock market is a wise investment for you.
  • Calculate how much you want to invest.
  • Determine the return you’ll need.

Remain Objective

Though knowledge and experience play key roles in investing, especially while finding your own strategy, self-control is just as important. When stock prices fluctuate in a way that goes against an investor’s expectations, feelings of insecurity and tension may develop, and understandably so. But traders who let their emotions, namely fear, dictate their investment decisions often have portfolios that suffer because emotions usually obstruct logic.

The important thing to remember is that stocks are inherently volatile. If you make all of your investment decisions because of market volatility, you’re bound to buy and sell at the wrong time. Instead, develop an investment plan that you can tweak based on data, rather than emotions.

Think Through Your Parameters for Buying and Selling

Because emotions can sometimes get in the way of smart trading, have a plan in place for both your overall trading strategy and each stock in your portfolio. Namely, you should consider under what circumstances you would buy or sell a stock. Once you purchase a stock, it can be helpful to write down:

  • Your motivations for buying it.
  • What your expectations are.
  • The metrics you will use to measure the stock’s progress.
  • Potential issues and how you will handle them.
  • Fundamental changes within the company that would cause you to sell.

Choose Companies, Not Stocks

It can be easy to forget that behind every ticker is an actual company. Remember that when you purchase a share, you are becoming an investor in that company, so do your homework. When searching for stocks to invest in, look into the company’s:

  • Management.
  • Financial statements.
  • Industry.
  • Competitors.
  • Long-term prospects.

Evaluate Your Risk Tolerance

R isk tolerance is a psychological trait that refers to how comfortable you are with taking risks and the level of anxiety that you feel when there is a potential risk; it is the amount of risk you will tolerate while pursuing a more favorable outcome. Everyone has a unique risk tolerance based on things like their age, wealth, income, and even their education.

Aside from personal and social factors, a person’s risk tolerance is also influenced by their perception of the risk. Risk perception is perhaps most recognizable in our modes of transportation. For example, riding in cars and flying in airplanes is no longer considered as great of a risk as it was 100 years ago because they are more common in our modern society. Meanwhile, as horseback riding has become less prevalent, many people have become more and more hesitant to ride a horse.

This same concept applies to investing. As you become more familiar with the stock market, you consider the whole process less risky than you do when you’re first starting out. With that being said, it’s important that you spend time evaluating your individual risk tolerance because it helps you avoid making investments that are anxiety-inducing. Refraining from purchasing stocks that test your risk tolerance is important because when people feel anxious, they often react with their emotions rather than their logic.

Take Your Time Building Positions

Unless you’re interested in something like day trading, the time you take to build your strategy should take precedence over trying to get your timing just right. A lot of investments appreciate over months or years, so slow down and take your time researching and purchasing shares. A few useful strategies for minimizing the risks associated with price volatility are:

  • “Buy the basket”: Rather than choosing and purchasing just one stock, you can purchase all of the ones you’re considering, allowing you to reap the benefits if one takes off while offsetting any losses from other stocks in the bunch. This strategy also helps you determine which stocks are worth doubling down on if you choose to.
  • Dollar-cost averaging: Dollar-cost averaging, or DCA, simply means that you invest a predetermined amount of money intermittently, like once a week or once a month. This strategy allows you to avoid some of the dangers of market timing, save money, and reduce the effects of volatility. Additionally, regularly investing in the market allows you to capture a variety of stock prices, lowering your average cost per share.
  • Buy in thirds: Another way to avoid the pitfalls of volatility is by deciding how much you’d like to invest, dividing it into thirds, and then picking the three trigger points, or markers, for buying shares. These trigger points can be based on time, such as every month or quarter, company events, or a stock’s performance. For example, you could purchase shares with a third of your budget before a product is launched and then invest the next third if it is successful. If it’s not, this strategy allows you to divert those funds to another more promising investment.

Refrain From Overactive Trading

When short-term fluctuations occur, it can be difficult for even the most seasoned traders to sit back. Temporary price fluctuations and headlines typically have little effect on how a company performs long-term. What does have an impact is how investors react to the changes. Investigate the cause of a sharp price movement and remember to revisit your investment plan. Your protocols for buying and selling will serve as a guide during the inevitable turbulence that comes with investing in the stock market.

Diversify Your Investments

Wise investors manage their risks by diversifying their portfolio. In other words, they participate in different forms of investing and own stocks in a variety of companies, industries, and even countries. This protects them and their assets because a single negative event will be less likely to have an effect on all of their holdings. Put simply, diversification allows you to recover your losses and minimize the impact of one bad investment.

Avoid Using Leverage

Leverage refers to the use of borrowed money to make investments. In many cases, brokerage firms and banks offer loans so that you can purchase stocks. These loans typically equal 50% of the stock’s purchase value. Though this can be a useful tool, it’s best to avoid it because it exaggerates the effect of the price’s movement, causing the risks to outweigh any potential benefits. When using leverage, if the stock falls, you will not only owe the loaned amount, but you’ll also be responsible for paying interest for the loan.

Track Your Investments

Check on your investments to make sure they’re progressing, but don’t do it so often that it leads to overactive trading. Instead of reacting prematurely to any movements, write down changes in the stock or company so that you can monitor the changes over time and make wise decisions when it comes to selling.

When you’re entering the stock market, the most important thing you can do is to assess all of your needs, goals, expectations, and threshold for risk as well as learn the ins and outs of trading. By familiarizing yourself with helpful tips on stock market trading, you can reduce your risks and make informed decisions that, hopefully, help you generate some sizable returns.