Saturday, March 10, 2012

Stock Losses - Ten Tips On How Not To Burn Your Fingers In The Stock Market

1) Start with a small amount-

Remember when you invest in the stock market you can lose all of your hard earned money. And as a newbie you are likely to make all the wrong decisions. So till you gain some experience it is best to invest a small amount of money. Invest only that much amount which you are comfortable losing especially if you are investing for speculative purposes or quick profits. This will be your best strategy to minimize your losses as you begin investing in the stock market.

2) Keep an open mind and keep experimenting-

There is no single right or wrong way to investing in the stocks. Even if you follow some tips you have read on a website or have read a book on investing in the stocks or taken some friends advice, remember things don't always happen as you plan or wish. So remember to keep an open mind and experiment new things.

3) Don't be greedy-

We all have been taught this principle from childhood. So you may think why am I even mentioning it here. But greed forms a cloud on your mind that causes you to stop seeing the obvious and you don't see the pitfalls which you could have easily spotted otherwise. When I started investing the only thing I kept thinking about was how much profit I would earn quickly if I acted on a stock tip. Even though I thought, I might make a loss, at the back of my mind, I would completely ignore that fact and behave as if I would never make any loss. Be practical. Don't expect to earn $10,000 on your investment of $1000 in 15 days!

4) Buy the best stocks-

Trade only in the best stocks. Choose well established companies. There are some stocks that have high price volatility, which means there is a higher fluctuation in the daily price of such stocks. These stocks may give you higher returns but beware! There is a huge risk in investing in such stocks! You may make some profit on one day and the next day all your profits may get wiped off! So choose reputed companies even though they make have lower price volatility.

5) Use you own mind-

This tip is not meant to offend you. But this comes from my own experience. Do not blindly follow the tips given by friends, family, discussion forums or websites. Do not believe in rumors. I read the discussion thread on a forum and bought huge quantities of a particular stock. Now my stock has eroded 65% of its value. Only later did I find that the company I thought was going to give me huge and quick profits was on the brink of bankruptcy and was making straight losses for the last 4 years. All this information was available on the internet but it never occurred to me that I should do some research about the company I was going to invest in. So even if you have never invested before make your own mind and choose your stocks. Your guess is as good as anyone else and if you have followed tip1 you don't have much to loose. Don't forget to find as much information as you can, about the stocks you are planning to invest in, on the internet.

6) Don't buy at 52-week high price-

Many finance related websites and the stock exchange website displays some basic details about each stock like its current price, previous days close price, stock charts etc. In addition you can find the highest price reached by the stock in previous 52 weeks. I bought my loss making stock at its 52 week high price only to find later that the price started sliding downwards. This may not be true in all cases but its better to avoid buying a stock at its 52-week high price.

7) Don't pour more money to cover your losses-

There is a tendency to cover your losses by investing more money in some other stock you believe will earn huge profits. It's best to avoid investing more money to cover your losses till you get some experience of investing in the stock market. This is one mistake I did not make but some of my friends did. There may be some macro events at play that may be affecting the entire market or a particular sector. Some examples are fears of a recession in the economy, this event will affect all the stocks to some extent. Take another example, imposition of new taxes in the cement industry will affect all stocks in the cement sector. So if you pour in more money into some other stock and some of these macro events are at play you stand to lose money in these new stocks as well.

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