by Jeff Reeves | September 21, 2013 7:21 am
How to make money in stocks isn’t an easy investing question to answer, but it’s not impossible for investors with determination and self-awareness..
With good investment tips you can learn how to make money in stocks quickly – or more importantly, how not to lose money in the stock market.
How to make money with stocks at multi-year highs involves understanding your limits and how Wall Street works, as well as crafting an investment strategy that doesn’t change depending on the way the wind blows.
So before you open up a brokerage account or start playing with an IRA recklessly, understand how to make money with stocks by leaning these five key investing tips.
Or more precisely, figure out what NOT to do with your cash before you worry about the best stocks to buy.
How to make money is stocks is simple when you start with these mistakes, and then build good practices on top of these lessons.
Chasing the Herd: When asked how to make money in stocks, a lot of people offer the phrase, “buy low, sell high.” But frequently investors forget this after popular investments get widespread media coverage and investors wind up buying in at a very high price after the run is mostly over. Take Apple (AAPL), the red-hot tech stock that soared to $700 a share and now trades under $500 a share. It seemed like Apple could do know wrong last year, but people bought at the top even though they knew on some level this isn’t how to make money in the stock market. Be aware that momentum frequently moves both ways, and don’t make investing decisions just based on what’s popular.
Not Letting Go: The other side of the “buy low, sell high” that investors forget how to make money in stocks by locking in those profits while they last. Often investors will fall in love with an investment that has done well, convinced that if it made 50% this year it will make 50% more next year. Unfortunately, that kind of track record isn’t common and it’s safer to trim back a bit before the stock loses its luster. If you sell half your shares, for instance, you lock in some profits while still participating in a little bit more upside should the run continue.
Not Letting Go, Part 2: Of course, bad investments can be equally hard to sell. Nobody likes to lock in a loss, and it’s easy to convince yourself that the deep declines are short lived and that a rebound is right around the corner. But holding on to a perpetual loser is now how to make money in stocks. So remember this: If you invest in a stock that plummets and you need to make 20% to get back to even, there’s no rule that requires you to make that 20% in this specific stock instead of an alternative investment… so why not move your money? It’s often easier to find a new pick with a bright future rather than depend on a battered company to somehow turn things around.
Getting Greedy: If you have big confidence in an investment, putting a lot of money behind it often sounds like a good idea. But it’s awfully risky to put all your eggs in just one or two basket. Always err on the side of diversification when you’re deciding how to make money in stocks, and never allow a single position to represent more than 10% of your portfolio – even if you think it’s a “sure thing.” Because while a big bet pays off quickly when you’re right, it can cause serious damage when you’re wrong. Better to play it safe and stay diversified, even if it means not going “all in” on your favorite stock.
Timing the Market: Countless reports show that timing the market – that is, trying to sit out the bad times and jump in headfirst when things turn — does as much harm as good, and is not how you make money in stocks. When you sit out the market, frequently you fail to participate in rallies; when you go all-in, frequently you pick the wrong time to buy. Then there are the extra trading fees and short-term capital gains taxes, not to mention the added stress. So unless you have a crystal ball, stick to long-term investing instead of jumping in and out.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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