7 Basic Rules of Stock Trade You Need to Learn Before Investing

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You may know a thing or two about stock trade as an economics, business, or finance major. It always looks easy in theory. If you are passionate about the subject, you’ve already thought about your future possibilities to invest and profit.

The stock market may seem confusing, and many people prefer to stay out of these games. You indeed have to recognize red flags before joining anything or investing your money. Many people stay as far as possible from investments as they often misinterpret standard practices with deceptive multilevel marketing strategies. 

Just like with your studies, you can always trust a third party to decide the best strategy for you. It’s similar to the most common request you can find in Google “help me write my essay,” but there is a huge difference. Dealing with brokers and third-party involvement always has its risks. Higher risks and higher losses are relevant when you are a student who can’t afford the services of a broker. 

It is possible to work on your strategies and plans and learn how to navigate through the volatile world of stock trading. As much as you may know from your courses, the real world always changes, and it can do so overnight. Therefore, you might consider starting to learn about the companies you are interested in. 

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Never follow the crowd

It may be described as the herd mentality phenomenon when you are influenced by rumors or actions of others. That’s what differentiates the problematic marketing strategies from adequate approaches to investments. 

You should never follow someone blindly and make decisions you do not fully understand. It may have some results in the short-term perspective. Yet, in the long run, it will definitely flop.

Research the company you’re interested in

Theoretical knowledge is essential, but for making an informed decision, you have to analyze the situation. Understanding the stock market involves analyzing and predicting possible outcomes of the company. First and foremost, you should gather financial documents that are open for public access:

  • Form 10-K is an annual report that has the company’s key financial statements reviewed by independent auditors. It provides you with information on a company balance sheet, sources of income, and how it handles its finances (including revenues and expenses). 
  • Form 10-Q is a quarterly update on financial results and operations. 

Reports give you an insight into financial aspects. At the same time, you should look at the company’s ethics and other aspects that would be a dealbreaker for you. You won’t be interested in a company that has a history of employee abuse or lack of transparency.

Invest only in the companies you understand and trust. Indeed, some companies can be dark horses, but you can save yourself from worrying by analyzing them beforehand. 

Don’t rush into the big game

When you develop a profitable investment strategy, you often have to focus on companies you trust. In other words, don’t try to follow more than one or two companies’ updates and news. As a beginner, you have to make sense of what you can already assess.  

You should tone down your greed or fear to lose momentum as you make these first steps. It is similar to avoiding herd mentality, but here you want to look closely at the companies of your choice. 

Invest the money you can afford to lose

The promise of profit and success often makes us take a risk. It may seem an obvious rule to uphold, but it is an essential one. Never invest your savings or expect the investment to playoff right away. Just like the rule of investing in fewer companies and buying fewer stocks, your losses shouldn’t bring debt to you. 

Even if you feel you got the strategy, it is better to be safe than sorry. Diversify your stakes with capital-guaranteed security or products instead of betting only on assets.

Avoid individual stocks as you begin

Start with an index fund which means a mutual fund or an exchange-traded fund (ETF) investment. These funds hold dozens of capital, and you would share a part of the fund, not the company’s assets. Why should you do so? When you start with individual stocks you can go bankrupt easily. It is a more secure way to start putting money into, and it’s more about skill than luck.

Diversify your portfolio

A diverse portfolio doesn’t simply mean many different assets. The easiest way to create a portfolio that would be a cushion in case of market fluctuations is by buying mutual funds or the ETF. You still have to do your research to make the best decision, but it would be more beneficial for you in the future.

For instance, you can also invest in funds based on the S&P 500, which includes stocks in hundreds of companies. 

Always be ready for a downturn

Indeed, many investment beginners (like in any other area) have to face what they fear the most. You have to be ready to witness the market fluctuations that can lead to losses and keep working on your strategies. Many people quit after their first downturn and never come back to the stock trade. Yet, it is a valuable lesson you can take to your advantage.

At the same time, being mentally stable is crucial when you begin anything. Yes, it may sound obvious, but you should never begin your journey in the place of despair. If you have any doubts or debts, it is better to deal with them before putting yourself under a lot of pressure.

The Bottom Line

If you want to make sense of stocks, soon enough you will discover all the nuances and aspects that professional shareholders acquire after years of experience. 

You should always remember these golden rules of stock trade above anything:

  • Not every risk is worth taking;
  • Spend as much time on research as possible;
  • Trust in index funds as much as in individual assets;
  • Always look for different outcomes but have a solid strategy;