What Every Investor Should Know Before Buying a Stock

Anyone can invest in a stock.

But it’s takes a disciplined person to invest well.

So, the question then becomes, how?

To begin, no matter your skill level, all investors must understand these three key principles:

To succeed in the market, you must develop a healthy relationship with it. You cannot allow emotion to control your risk.

Defining risk is critical.

Develop a low stress plan going forward. Remember to look before you jump.

Always be informed and educated before jumping into any stock or option.

Also, know where you stand right this second.

What are your goals?

  • What can make an investment unsafe, a real speculative gamble for you?
  • Are you an investor or a trader?
  • Where do you stand financially? How much money are you spending a month? And how much do you honestly have to put towards investments each month?

This may sound odd, but have a desire to be a better trader, too.

To become a great trader, you must think like a great trader. That means studying and paying attention to every little detail. Because it’s that one little detail that can change the direction of a stock… We all know that.

To do so, finds areas of yourself that need improving as a trader. And just do it.

Brush up on the Basics

Another obvious tool – brush up on the basics. It doesn’t hurt to do so. Sometimes you may have to take a step back before taking the next big step forward. Maybe have a mentor (like me) utilize the tools your mentor may offer, too. You can always learn more by talking to others.

Diversification is Always Key

Diversify, diversify, and diversify. You know the old saying, “Don’t put all your eggs in one basket.” The same applies to stocks.

Learn from your Mistakes

Also, learn from your mistakes. When you make an error, how do you react? What do you do? Do you sell? Use the information from failure to learn for the future.

In addition, keep updated on the news. Stay current so you know what’s hot and what’s not.

Money Management

Above all else, use your head especially when it comes to money management and planning.

Trading without a plan is about as good of an idea as driving blind. Money management defines your risk. How much are you willing to risk per trade?

This will give you a way to set aside a set dollar figure per trade each and every time. We don’t know if ‘the’ next trade will be a winner or a loser. Why bet the farm when you can’t afford to lose the farm?

None of us can afford to do that…

If I knew that 7 of my last 10 trades would be a winner, but I didn’t know which ones, how would I allocate my capital risk? To be safe, we’d allocate up to 5% max on each trade. This way, you control your risk without risking the farm. I apply the same risk to each trade.

Depending on whom you speak to, experts say to risk 1% to 3% of working capital on any one trade. The most I’d say is 5% max. How much loss can you tolerate? Don’t use a % until you realize the $ amount it translates to.

Once I know my personal risk equivalent, I can lay out a game plan.

You should also be familiar with stop losses, or a price trigger that protects you in case of falling stock value. It’s an insurance policy that will protect you if the stock falls. Some traders use a -25% stop loss for example. If the stock falls 25% from your buy-in price, the stop is triggered and the trade is over.

And, you should be familiar with a trailing stop-loss, or the order given to a brokerage to sell a position once it drops by a certain amount or hits a certain price level.

Trailing stop losses are essential in today’s trading environment.

Say you bought stock ABC at $6 a share ahead of an FDA decision.

As it pushed toward $9.00 a share just weeks later, you begin to get a bit nervous that the run is coming to an end. So, to protect your gains should the bottom begin to fall out, you can use a 10% trailing stop-loss. In this case, you’d set your trailing stop-loss at $8.10 ($9 x 10% = 90 cents; $9 – 90 cents = $8.10). It’s a safe, easy strategy that should be part of all portfolios.

Both stop losses help remove emotion from your trade.

Remember, anyone can trade a stock. But it takes discipline to trade it well.