Investing in the Stock Market
Investing in the stock market is the most easily accessible way for a common joe to strike it rich. Common 'Joes' turned stock traders are called "retail traders." Very few retail traders are actually able to strike it rich in the stock market and many lose all their money. Why? Well it takes a lot of self discipline and a realistic, forward thinking approach to be successful. And very few people posses these traits. Here is a summary of some tips for investing in the stock market.
Know your timeframe
Are you investing in the stock market for 10 years? For 1 year? Or for 1 week or less? While some stocks do go up and down 10% per day, most stocks do not move that much on a daily basis. So if you are investing for only a week you shouldn't set an investment goal of 10%. An investment goal of 1% is probably a better idea.
Be a forward thinker
So you're losing money on a stock. It happens. Don't take it lightly, but don't stress over it either. Instead make the best decision you can for yourself looking forward. If you believe the stock is going to go down further, then get out. It makes no sense to stay in a losing stock because there is a slight chance it will return to your purchase price. A study was conducted and found that when people lose money in stocks then they begin to make increasingly irresponsible and reckless decisions in an attempt to win their money back. Don't fall into this cycle!
Always have a stop loss
Before you buy a stock, determine a price at which you will sell the stock at a loss to prevent yourself from losing even more money. At the same time gauge the price that you think the stock is headed to. Then compare these two numbers to determmine your risk to reward ratio. If the risk to reward ratio is less than 3 then you are taking too much risk. For example, if you buy Microsoft at $20 and you decide to place your stop loss at $19, then your risk is $1. If you think Microsoft is headed to $25, then your reward is $5. So your risk to reward ratio is 5/1=5. Since this is greater than 3, you should take the trade.
Don't chase stocks
You might wake up one day and see a stock that you intended to buy, but haven't bought yet trading up 10% so in a panic you buy the stock... Only to watch it drop a few percent. You just got burnt chasing stocks. Don't chase stocks. The best time to buy a stock is when it has been in a tight price range for a long period of time (at least 15 days), this is called a "consolidation" phase. Be patient, your trade will eventually play out.
Buy profitable companies with low debt to equity ratios
Stocks go up in price because investors believe that the underlying company has growth potential. So what type of company has growth potential? Definitely not a debt-ridden, unprofitable company. A company like that will be scrounging for cash to pay off its debtors. But a profitable, low-debt company will have the cash on hand to make acquisitions, hire employees and increase their market share. These companies will do much better over the long run than companies with a lot of debt.