13 Warnings Before You Invest Your First Dollar

Editor's note: This is a special excerpt from TheStreet.com Ratings' Ultimate Guided Tour of Stock Investing. Other Beginner's Guides cover stock basics, market indices, diversification, financial goals, risk tolerance, growth and income stocks, brokers and "10 Questions to Ask Your Broker."

Here's our list of tried-and-true tips to read before you invest your first dollar. Some are so obvious it doesn't seem we should mention them. But many beginning investors make these common mistakes -- and there's a reason why there are 13 of them.

The operative word here is "Don't!"

1. Don't borrow money to fund your stock account. Don't take cash advances on credit cards, or borrow money from friends or relatives. You don't need the added stress of collection calls or angry acquaintances if your investments don't go well. If you must borrow money, you probably shouldn't be trading stocks. Build up savings (and thus cash) as a foundation, before taking greater risk with stocks.

2. Don't "bet it all" on any one trade, no matter how favorable it looks. A few winners in a row or a tip from an "indisputable source" makes some people put all of their account at risk by plunking it down on a single trade. Risk it all on one stock and you can risk everything. Don't do it!

3. Don't pay too much in broker commissions. Shop around and find a good broker with competitive rates. If your commission costs are too high, you will need to make more money on the trade just to cover costs. Keep your transaction costs to a minimum by shopping around (see "The Beginner's Guide to Brokers"). The lower your transaction cost, the closer you are to the territory all investors aim for: net profit .

4. Understand what "averaging down" is before you do it. In a nutshell, averaging down means that you lower the average price you've spent on a stock by purchasing more after your original investment declines in value (see dollar cost averaging ). This means you were wrong about the direction of this stock (or you haven't been monitoring the stock closely enough during a slide) to begin with. If that's true, you might consider exiting the existing stock position too, take the losses , and move that money on to a more favorable position. There are strong arguments for taking either approach.

5. Don't fall in love with one stock. Even if you feel like you are an expert on a particular company, diversification is a key to investing success. It may be more prudent to spread your investment dollars around to several stocks (preferably in different sectors or industries). Remember the old saying: "Don't put all your eggs in one basket." It applies to smart stock investing too (see "Beginner's Guide to Diversification").

6. Don't pay too much to enter a stock position. Demand a fair price at entry and exit by using limit orders . You don't walk into a car dealership, select a car, and then tell the dealer that you are willing to pay any price for it, do you? The trading floor will be happy to collect any amount you are willing to pay above a fair price. But if you overpay, and the stock falls back to a fair value after other investors withdraw, you'll lose on your investment.

7. Use other kinds of orders to control your broker. In addition to limit orders, good until canceled and day orders are handy tools, too.

8. Don't let judgments in hindsight make you crazy. The "perfect" entry and exit points are always easier to spot when looking at past prices and charts. Everyone is a perfect market timer when he or she has the benefit of hindsight. If you are able to perfectly time entry and exits in the present on all of your trades, you can do something that no other human has ever been able to do.

9. Don't allow yourself to fall into the trap of moving targets. You should never be waiting "a little longer" to "see if the stock can go higher." Take profits at your preset profit target or risk seeing a good profit be wiped away by volatile swings in trading. Greed is your enemy when you fall prey to this approach. Know your exit price before you enter each investment and then exit at that price.

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