Just around the turn of the decade, I was questioning my many years of computer progamming and analysis and the growing difficulty of finding contracts and even salaried work. I entertained the notion of writing my broker's exam and even did a great deal of studying, as a supplement to developing some trading models I'd been working on since 1991.
I used the models to predict three of four market turns in 2000 but decided that being a stockbroker wasn't really what I wanted. I did learn a great deal about stock investing in the past decade: mostly that paper trades are often meaningless theory, and only by performing actual trades can you learn anything. And learn I did, from making some big mistakes. But it's best to get your failures out of the way early in your investment "career". Here are a few tips for better stock investing.
- Know your investments.
Would you spend thousands of dollars on a house or a car without geting to know what you're purchasing better? Why should stocks be any different? If you plan to put a significant amount of money into a stock, learn what you can about the company, the management, and the industry. What's more, learn about other industry that either affect or are affected by this industry. For every extra $2000 that you are investing, you should put in a few more minutes per day in research of your stocks and chosen investment sectors. - Don't blow your bonus.
Don't put all of your work bonus into a single stock, unless it's a solid performer and part of a long-term investment plan. For short-term investments, consider partitioning your bonus over different investments, including mutual funds if the amount is small. Consider also actually spending a part of it, as a reward - and possible motivation to make a wise investment with the rest. Otherwise, you end up like me, blowing a $3,000 bonus on a horrible mining penny stock, with no enjoyment of a single dollar of it. Of course, you could just save it all in an online savings account. - Invest only what you can afford to lose.
Unless you're flush with extra cash and your investments are not risky, buying stock on margin can be dangerous to your wallet. You can go from positive to negative in a snap, if a stock drops. The insidious part is that the stock could rise back the next day, but because of margin terms, your trading account provider may have called your margin. People can and do go bankrupt from overusing their margins. Only advanced investors should utilize full margin. If you use it, keep the amount low enough (as a percentage of total investment) that if the margin gets called by your brokerage, you won't suffer overly. And use a stop-loss sell price setting to enforce this. - Don't invest in just one sector.
Unless you're very experienced or can afford to lose your investment. Some sectors are directly affected by the performance in other sectors. Know your sectors and their interconnection so that you can avoid overloading in one general area (unless you live on risk, in which this article isn't for you anyways). - Convert to cash.
If you're concerned that a company has had a marked change in the way they do business, do some research first, but consider converting to cash. Save the money in an online savings account for a better interest rate, if your trading account pays diddly squat.
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