Stocks

The Three Stock Market Game Rules

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Trading on the stock market is daunting, and making a profit on a consistent basis can be a complicated challenge. However, here are three rules that can help you to make a smooth start to investing. All of them are very simple and involve improving your odds and compensating for your losses.

Ride the tide

Investing in the stock market is, essentially, a bet. Like in any bet, it’s in your best interest to keep the odds in your favor however you can. The more all of the shares on the market are going up in value, the better your odds are on you making a profit on your stock purchase. Try to look out for any industries that are going up and, if the entire market is doing well, seize your chance to buy. Work hard to weed out any stocks that are performing consistently badly in your portfolio to boost the probability of good performance, especially when markets are going down. Stick to keeping your assets in cash if the market is doing awfully.

Cut your losses

The only definite end point of share’s losses is when it hits a value of zero and you have lost all of your investment. If a share starts tumbling, therefore, you have no way of knowing how much more value it is going to lose. However, there is an easy way to make sure you don’t go bust because of one badly performing stock. Before every investment you make, you need to calculate a sell point: the value of the stock at which you force yourself to sell it. As an absolute limit, in a “bear” market, in other words a market where buying is encouraged by rising stock prices, you should set your sell point at around 20 per cent.

In a “bull” market, where many stocks are being sold and share prices are going down, your sell point should be, at most, a 15 per cent loss in value. It is always safer to set your sell points more conservatively than this. More careful investors will set their sell points at 10 per cent or even 5 per cent. Being disciplined about your sell points is difficult, especially with volatile stocks, but you will notice that the number of times you will miss out on a rebound will be more than made up for by the amount of money you save by avoiding catastrophic losses.

Keep your winners

Some investors set sell points for both stocks that perform as well as ones that produce bad results. When they have made, for instance, a profit of 25 per cent on the purchase of a stock, they will sell it. However, this approach makes it hard to make enormous gains from single investments. Doubling or tripling the amount you invested in a single stock can make up for all of your losses in other investments, and this sort of compound growth is what makes investment in the stock market attractive in the first place.

Related topics:Advice for Dealmakers Advice for Investors Beginning Investor
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