Back in the day, as the saying goes, car engines were pretty simple. If you could learn how to diagnose a few common problems and change some of the basic parts, you could keep your car running for a long time without going to the mechanic. Engines were bigger, so you could easily reach the alternator, the starter, and all of your wires and vacuum hoses. You could even temporarily replace a belt with a pair of stockings - no joke. Of course, that wouldn’t get you far, but it would at least get you off a deserted, dark interstate. You really only needed to know a handful of basic rules to get by pretty well.
Like your old car, you only need 25 basic rules for investing money in stock markets. No, the stock market is not a Chevy 409 V-8. And yes, like car engines, the stock market has expanded and changed exponentially over the years. But even with today’s hyper-engineered, minutely-detailed engines, the basic rules still apply (at least with gasoline engines - electric engines are another matter altogether). Brake pads have advanced, but they generally aren’t that different than they were 20 years ago. Your spark plugs are more efficient, but they’re still vital to internal combustion just as they were in a ’64 Mustang. And yourinvestment portfolio can still be successful by following the 25 basic rules for investing money in stock markets.
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25 Basic rules for investing money in stock markets (aka - everything you need to know so you can make money)
Let’s get one important caveat out of the way. There are no guarantees in life. Not in repairing your car and not in the stock market. Brand new brakes and the highest-rated tires are no match for a patch of ice. And even the 25 basic rules for investing money in stock markets can only do so much to protect you from unanticipated events. Luckin Coffee (LK) was a perfect example of this when it was suddenly discovered that they may have fabricated millions of dollars in quarterly sales.
Even so, when you stick to the basics, you’re in a good position to weather most of the ups and downs of the stock market. Over the decades that we’ve published our investing advice, we’ve seen the benefits of these rules in action. So without further ado, here are the keys to success - the 25 basic rules for investing in stock markets.
- Be an optimist. We’ve seen many ups and downs for both the market and our country. But after every tough event, our dynamic country and economy have eventually rebounded.
- Find an investing system that works for you, then follow it. The best way to deal with stress from the market is to have a game plan ahead of time.
- Stick with what you know. Stay within your circle of confidence. If you don’t understand what a company does or how it makes money, avoid it.
- Stick with what you know. If you don’t understand what a company does or how it makes money, avoid it.
- Stay informed. Knowing what to expect allows you to make better decisions.
- Never try to buy at the bottom or sell at the top. If you try, you’ll just lose more money.
- Invest in companies that pay dividends. If the company pays a decent dividend, you can sit back and collect dividends while you wait patiently for your stock to rise.
- Diversify your portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
- Don’t be afraid to take profits. When investors make big gains in their portfolios, they often don’t want to sell out their winning stocks. But not taking profits is a foolish mistake. You’ve got to pay yourself for your work.
- Let your winners run. When a growth stock is showing big profits, some investors will completely sell the stock. While booking a few smaller profits is fine, doing it across the board makes it impossible to enjoy the wealth-building benefit of a high-quality stock.
- Cut your losses short. When a stock starts falling, you have no idea how far it might go. The only theoretical limit is zero.
- Stay calm. It’s important not to panic in volatile situations, because panic leads you to make poor decisions.
- Control your risk. Divide your money equally to build your portfolio. The number of shares you own is totally irrelevant.
- Set loss limits. If a stock drops below 15 - 20% of what you paid for it, it’s time to sell.
- Know when to do nothing. Investing during rough markets can feel scary. Make adequate preparations, like putting in stop loss limits, but don’t feel compelled to do something costly–like selling your best stocks–just for the sake of doing something.
- Be patient. Recognize that time is your friend in most investing. Frequently stocks don’t go up as fast as you might want them to.
- Buy more of your best-performing stocks. Add a modest number of shares to your winners from time to time.
- Ignore the economic news. The stock market is always looking six to nine months ahead, so today’s news means nothing.
- Invest in fast-growing companies. Your best bets are in small companies growing at triple-digit rates—100% or better—through organic growth, not acquisition.
- Find a company that has a big idea. It’s these big ideas that create an atmosphere that can push a stock to dizzying heights!
- Examine a company’s fundamentals and its stock’s technical performance. When analyzing the technicals, focus on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.
- Be humble. Making money in stocks is tough, so don’t kill yourself over one or two bad trades. We all make them.
- Go against conventional wisdom. Attempt to be fearful when others are greedy and to be greedy only when others are fearful. Going against the crowd can be an effective way to make money.
- Be an optimist. It’s worth repeating because it’s such a valuable rule. No matter how bleak the situation, always stay optimistic because the stock market will give you some dazzling investing opportunities!
- Follow Warren Buffett’s two rules. All 25 basic rules for investing money in stock markets can be summed up with Buffett’s two rules: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1. We might add one more: make money.
What rules do you follow as part of your investing strategy? Would you add to what we have here? Share your thoughts in the comments below.
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