The stock market can behave like an unruly animal. Sometimes, there is a raging bull market that raises everything towards the sky. Sometimes, there is a bear market the beats even the best of stocks into submission. If you are entering the stock market, you are going to have to attempt to tame the beast. Depending upon how you handle yourself, it can be a really rough ride or smooth sailing. Use the five steps to below to properly prepare and plan your investments.
1) Always Set A Limit
Every individual that invests in the stock market should never invest beyond their individual means. Always set a limit for the amount of money you are prepared to lose ahead of time. For example, if you have determined that you're going to invest in a particular mutual fund, make sure you set a stop loss. This will ensure that in the event of a stock selloff, you will exit your position rather than continue to take losses. Depending upon the amount of money you are investing, your stop loss may be between 10 and 20%.
2) Never Trade Emotionally
One of the hardest things to do is to not get emotionally attached to any specific stock. As we talked about in Start Winning With Money, stocks are an asset class and you must always look at them that way. If your plan is to keep holding a stock no matter what happens, you deserve to lose your money.
3) Stop Your Losses, Take Your Profits
An important part of trading, is taking your profits the same as you would take your losses. One of my favorite strategies, is to run with house money. What this means is that once I have made a sizable gain in an investment, I take the original investment back out. This way the only money I have left on the line is "house money". I can then use my capital somewhere else.
4) God Himself Can NOT Time The Market
No one has the ability the time the stock market, and you aren't going to be the first. Have a plan for getting out if you're wrong, and have a plan for getting out if your right as well. Everyone is going to make bad trades, and everyone is going to have winning trades too. The best part about the stock market is you only have to be right one time to really make a huge difference in your financial future.
5) Education And Knowledge Are Priceless
The game of the stock market rewards those that understand exactly what they are buying. The reason that I recommend ETF's for the average investor is because they are extremely liquid and offer an opportunity to make average returns even if you don't know what you're doing.
If you are going to invest in an individual stock, and I do not recommend that you do, you need to know everything about the company whose stock you intend to purchase. What does the company's finances look like? Does it consistently make profits or take losses? How is the stock priced versus its peers? Is the management reliable? What does the overall industry look like? All of these questions and plenty more will need to be answered before you make an investment.
Everyone makes mistakes, especially in the stock market. But by utilizing these 5 tips, you should be confident that you can ride the booms and ride out the busts.