How do you make money through stock investing? Knowing how to play the stock market is really not that hard. The reality is, most people do lose money in the market, but it is because they make a few critical errors. Here are three ground rules to help you make money investing:
#1) Have a cut-off point
One of the main sins investors commit is not having an amount to get out at. For instance, if you buy a stock for $15 and it sinks to $7, at some point you have to sell it before the risk is greater than the potential reward.
The reality is, some of your stock picks will lose money. This is true no matter how much research you’ve done on them. Knowing when to pull the plug on the losers is critical. Cutting your losses and riding your successes is the key to making money in investing.
#2) Focus on one strategy
Fundamental and technical analysis are the two main kinds of strategies there are to picking top stocks to buy. Both of them work. The problem is, many investors do not pick one or the other.
Becoming an expert at one of these two strategies is the way to make serious money. If you try and dabble in both, you will just spread yourself thin. The result is, you will probably miss some great opportunities.
Fundamental analysis is where you focus on the business itself, such as the income statement, balance sheet, etc. You look at its’ overall profitability. You then only focus on buying businesses that are making money. It is based on the assumption that long term, the stock price will reflect the businesses’ worth.
Technical analysis, on the other hand, ignores the business. Instead, it just focuses on the stock price. It goes on the assumption that short term, the price of a business can go up even if a company is not performing well. a great example of this is the Dot Com era.
#3) Focus on businesses you understand with fundamental analysis
This is vitally important. Remember, in fundamental analysis you are investing in the company itself, not the stock price. Would you ever consider investing in a company where you did not understand the economics?
If you do not know the product well, you will not be able to analyze the long term potential of the business. This is one of the main secrets to Warren Buffett’s success and it’s very important for making money in the market.
Additional Resource
The Motley Fool