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How to Not Get Burned by Low-Priced Stocks

NEW YORK ( TheStreet) -- You can burn cash in all sorts of ways. Take up a hobby. Develop a habit. Rescue too many pets. Have too many kids. While you cannot put the one that snuck past the defense up for sale in the rotten kid auction, you can avoid losing money in the stock market.

The blame we like to direct toward "fat cat bankers" and rich CEOs notwithstanding, you can protect yourself from losses with hard work and, maybe more importantly, common sense. It also doesn't hurt to use readily available tools.

For instance, you buy 100 shares of a $15 stock. You tell your spouse you just risked $1,500. Not so: Risk equals the difference between your cost basis and your stop loss. One size does not fit all, but to avoid catastrophic losses, be ready and willing to take a series of small losses when things do not go your way. That's not rocket science.

Losing money comes with the territory in trading and investing. The winners just do a better job of managing (or they actually manage!) their capital.

As we learned the hard way with the Facebook (FB - Get Report) IPO, use public information. Never buy a stock without scouring its public filings, particularly a couple years' worth of quarterly and annual reports. Had more people read through Facebook's S-1 filings, we might not hear so much whimpering and moaning.

Do unconventional due diligence
If I have learned anything during my time in the media, it's that it generally pays to do the opposite -- or simply not do -- what talk radio show callers and message board commenters say you should do.

Consider Sirius XM (SIRI - Get Report).

It might as well be a sports team. Not only is almost every message board comment made by a Sirius XM bull emotionally driven, but many come from people with vanity plates for screen names. SiriusBrit. Siriusman. Sirifiar. SIRI Dog Millionaire. siriusenough2012. serious business. Siriusly Undervalued. And my personal favorite, Sirius Love.

I did not make any of those names up.
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ECTY $0.00 0.00%
FB $116.73 7.20%
SIRI $3.92 -1.51%
TSLA $247.54 -1.60%
AAPL $95.03 -2.90%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

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