If you’re an investor, you’re bombarded with stock investing tips from all directions. But what are the best stock investing tips? And what are the tips that will reduce the chances of losing it all?
Whether you’re an experienced stock picker or a beginner, we’ve got some quick tips for you.
1. Practice and Simulate Real Trading
Even experienced investors and traders can benefit from simulated trading. Some of the best stock brokers offer paper trading accounts and simulations where you can customize your conditions and test different strategies.
For beginners, a mock trading account can help you understand prices and learn how to trade on the platform. You can also see how certain investments are performing. More advanced traders often use simulated trading to test advanced strategies.
2. Diversify your portfolio and explore industries
One of the first rules in constructing an investment portfolio is diversification. Selecting assets from different parts of the market increases your chances of sustaining performance because stock prices in some sectors may rise even as investments in other sectors fall.
Stocks are classified into one of 11 official sectors recognized by the Global Industry Classification Standard (GICS) framework. Within these 11 sectors, there are 25 industry groups, 75 industries, and 163 subsectors.
For most beginners, it makes a lot of sense to start with sector diversity. The 11 sectors are:
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Communication Services
- Utilities
- Real Estate
Studying which sectors perform better at different times will probably help you make sense of the business cycle. For example, during a recession, people still need to buy necessities, so consumer staples generally do well, but stock prices in the consumer goods sector may fall. Understanding how these sectors perform in the business cycle can help you decide when to buy and sell and what combinations make sense for your portfolio.
3. Thorough Research and Due Diligence (DD)
One of the most important tips in stock investing is to do thorough research. For index investors, it is not so much about finding the best stocks to buy. You just need to pick some indexes that fit your portfolio strategy and you are done. But when it comes to selecting stocks, due diligence is a key part of deciding what to add to your investment portfolio.
Learn how to read a company’s balance sheet and understand its earnings reports. Dig into past performance and consider various value measures such as P/E, debt-to-equity ratios, dividend yields, return on equity and other terms. Decide which factors are most important to your strategy and portfolio goals, and then apply those factors consistently when evaluating stocks.
4. Buy high, sell low
This concept is the basis of stock investing. However, that’s easier said than done. You can’t time the market or predict when stock prices will peak or bottom.
But you can increase your chances of selling your stocks for more than you bought them for by following these principles:
- Buy more stocks that are “on sale” during market downturns. Consider selling and making a profit after the market recovers, as long as selling fits into your long-term portfolio strategy.
- Consider the best short-term growth stocks to invest in. You know you will buy these stocks and then sell them for a potential profit within five years.
- Look for value stocks for long-term investments. These are stocks that are undervalued relative to other investments in their sector and have a high chance of being held for a long time and profiting.
5. Create a strategy and stick to it
You’d be surprised how many investors never create a portfolio strategy. Think about what you want your portfolio to do. Are you trying to build an emergency fund? Do you want to use your investments as part of a travel fund? Your portfolio objectives will help you craft the right strategy for your situation.
Your goals can help you adjust your asset allocation, decide when to buy and sell stocks, and make other important decisions. Basic approaches include cost averaging, third-party buying, and automatic dividend reinvestment. Decide what will help you reach your goals and stick to your strategy. This will help you avoid panicking and selling at the first sign of trouble and potentially taking a loss.
6. Let winners go and cut losses early
Frequent trading is a quick way for investors to lose money. There are two main temptations for individual stock investors:
- Taking quick profits when small gains appear and missing out on potential gains later.
- Holding onto stocks at a loss in the hope that they will eventually recover and make a profit.
Once you have developed your portfolio strategy and done your due diligence, you should be able to recognize when to hold and when to cut your losses and move on. If you have a winner and the fundamentals have not changed, you should consider letting that winner run a little longer to get higher profits. Make sure you sell at the given level. On the other hand, if you make a mistake or the fundamentals have changed, don’t fall into the sunk cost fallacy. Accept the loss and choose something else to compensate for it.
7. Avoid the Trap of Emotional Investing
It’s easy to get carried away with the excitement of a hot stock or to panic and sell at the first sign of trouble. Whether motivated by euphoria or fear, emotional investing will distract you from a dispassionate appraisal of your portfolio and the stocks you choose.
Identify and stick to your trade entry and exit points. If you have a framework for evaluating investments, don’t throw it out the window just because people on Reddit are hyping up a meme stock. Don’t abandon your long-term portfolio strategy during an economic downturn. Sticking to a plan can pay off in the long run, especially if it’s carefully researched and crafted.
8. Remember You Have to Pay Taxes
One of the most overlooked tips in stock investing is to pay attention to taxes. At some point, Uncle Sam will want a share of your profits. Consider capital gains taxes, including taxes you pay on long-term and short-term investments. Understand that you can use tax-loss recovery to sell losing investments and offset some of the gains on winning investments.
If your long-term portfolio strategy includes tax-deferred investment accounts, learn the rules and tax implications. For example, your strategy should consider whether you’re using traditional accounts or separate accounts. Whether you’re investing money in a Roth account or a health savings account, you should also understand the tax implications of rollovers and subsequent changes to your strategy.
Bonus tip: Use all the tools at your disposal, including AI
When it comes to stock investing, you have a lot of tools at your disposal. Artificial intelligence (AI) is also a useful tool to help you get portfolio ideas based on the criteria that interest you. While you might not want an AI to do all of your stock picking, it does provide some handy research tools to get you started.
Many brokers offer stock screening tools to help you narrow down your choices based on the characteristics that are important to you. Don’t forget about human investment advisors and experts who can help you learn the basics and develop a strategy. Think about what you need help with and choose the tools that will best help you reach your investment goals.