As an investor, you need the best strategies to make money in the stock market. These tips will give you more insight, so you can maximize your profit without making simple mistakes that will erase your gains.
1. That article you read is already priced into the stock – You stumble upon that article saying a company is coming out with a new invention, and you decide to buy the stock. In reality, fast traders already bought the stock as soon the news was released. Only future news will move the price of the stock.
2. Never try to fight the market – A stock that dives down in price is more likely to continue a downtrend than rebound in the immediate future. Similarly a stock that soars up is more likely to go higher than fade down. The rebound and fading trades are extremely risky and should not be played. Follow the trend.
3. Never be fully invested – You always want to have cash on the sidelines, so that you can take advantage of market opportunities when they happen.
4. Passive buying and holding doesn’t maximize your profit potential – You have to actively manage your portfolio. Gradually start selling shares when your stock goes up, and use that cash to buy back your shares during a market correction.
5. Be diversified in different market sectors – Owning two bank stocks is not a good idea, because if one gets hit, the whole financial sector tends to move. You should own one foreign stock, one high yield dividend stock, and gold for safety. The rest of the stock picks are yours. Never have 20% of your holdings in one sector or own more than one stock in the same sector.
6. An incredibly cheap stock can still drop further – The mentality that a cheap stock can’t drop any lower is completely baseless. A stock priced at a dollar can go to 50 cents, and a stock priced at a penny can drop to a tenth of a penny. Penny stocks are priced that low for a reason. The rest of the market thinks that these companies are worth little to nothing, and you shouldn’t think any differently.
7. Know the difference between trading and investing, and stick to your original intentions – A trader is looking for a short term catalyst that will move the stock price. But if that catalyst fails, you shouldn’t hold. Cut your losses and sell. On the other hand, an investor is looking to hold a stock for the longer term. If a short term catalyst moves the stock, do not sell out completely. Rather trim your position and save the cash for buying the shares back at a lower price.
8. Read earnings reports and listen to conference calls – Sometimes the market misinterprets a good quarter as bad or a bad quarter as good. There also may be some positive information in those reports that the rest of the market is not realizing. If you are observant, you can get an edge over the market.
9. Beware of stock recommendations – People who recommend stock probably already own the stock and just want you to buy to move the price up. Do your research carefully before acting on recommendations.
10. Read the charts – Look at the volume on uptick and downtick trades. If more people are buying the stock on uptick trades than downtick trades, then that is a bullish sign. However, if there is heavier volume on downtick trades, then that means that people are only interested in the stock at a discount, and that can be a bearish sign. Also look at moving averages and crossovers to identify bullish and bearish trends. Never make the mistake of assuming that a stock will go back up to its historical highs. Wall street doesn’t care where a stock has been, but only where it is going.