Are you wondering what the investment rules are f involved in stock market investing, but want to make sure your money is as safe as possible while doing so? If that’s the case, then you’re like millions of other newer trading enthusiasts who see the potential for large profits but also wish to hedge the risk and play it safe.
The question is this: are there practical stock market strategies and methods for stepping cautiously into the complex world of the securities markets? Fortunately, the answer is “yes.” Of course, there are no guarantees that employing the following techniques will result in a profit.
The other side of that warning is that these investment rules are a commonsense way to keep a close eye on your financial resources and avoid unwise practices. Here are six ways that anyone can take steps to safeguard the money they invest in corporate stocks.
The Investment Rules of Diversification
Diversification is first on this list because it is a universal financial principle. It’s the investment version of not putting all your eggs in one basket, according to the old saying, which is certainly smart investing advice. There are two ways to go about it.
First, you can diversify among the kinds of stocks you buy. For example, many people build portfolios with shares from multiple industries, like health care, financial institutions, manufacturing, and more. Another approach is to diversify based on company size, the age of the corporations, and other characteristics.
Overall, the second type of diversification involves adding non-stock assets, like precious metals and commodities, to your portfolio. It’s fairly common for long-term investors to use gold bullion or gold stocks as a hedge against the inherent risks of corporate stock shares.
Use Long-Term Thinking in Stock Market Strategy
One safety valve that anyone can use is long-term stock market strategy. In other words, the goal would be not to focus on short-term gains at all. This attitude is what retirement planners use to build collections of shares that have the potential to grow within decades. Often, long-term planners accumulate blue-chip stocks of the oldest and most stable companies.
Do Research for Smart Investing
There’s no substitute for doing your own research, sometimes called “due diligence,” when you put money on the line. Never take another person’s word at face value. Instead, spend at least a few minutes (longer is better) looking into the strengths and weaknesses of any corporation you’re thinking about investing in.
Avoid the Under-$5 Category
Some folks like to play the penny-stock field, which is fine if you have a lot of experience under your belt. For those new to the securities markets, the smart investing rues wise to avoid purchasing shares in the so-called “penny” category, which usually is defined as costing less than $5 per share.
Use Stop Orders as Part of Your Strategy
When you purchase shares of stock, it helps to use stops. That’s the practice of setting upper and lower limits on the price as points where you will exit the trade. For example, if you buy 100 shares of ABC Inc., at $12 per share, you might set a stop-loss at $10 and a stop-gain at $16.
Then, if the price rises above $16 or below $10, the system will automatically sell your shares and exit the trade, thus locking in a nice gain or protecting you from greater loss.
Reinvest All Dividends into Your Stock Market Investing
If you acquire shares that pay dividends, consider not taking the cash payout and instead re-investing whatever the amount of the dividend is back into the stock. In fact, there are people who only buy dividend-paying shares for this very purpose. It’s a clever strategy for growing a portfolio without having to buy any additional shares. There are entire programs called dividend-reinvestment-plans (DRIPS) that only hold these kinds of shares.