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
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
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
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.
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.
10. Don't let fear or greed into your investing mindset.
Objectivity is a key to success. Keep emotions out of your decision-making (see "
10 Ways to Build Trading Discipline").
11. Don't let trading excitement override common sense.
Four winners in a row should not make you "double up" or bet it all on the fifth trade. Control this temptation of greed. When you enjoy the "rush" of a good number of wins in a row, you are probably outperforming the average stock investor. KeepMurphy's Law in mind when you are experiencing these "hot streaks."
12. Don't overly resist taking losses.
Loss management is another key part of successful investing. Cut losses short and move on to other opportunities. While you can wait many years for a losing stock position to turn around or even become profitable, that is many years that the money in that position is held hostage. Could that money be better invested in some other position? All investors face losses in investing. It can be a very good strategy to take the loss and move on to a new opportunity (see "
Take Responsibility for Your Stock Losses").
13. Don't rely on "luck" or "hope."
"I think this is my lucky day" is
a good foundation on which to risk money in new stock investments. Study the market, and the choices you're considering. If most of your rationale is based on luck or hope, you are probably not going to enjoy long-term success with stock investing.
This article was written by a staff member of TheStreet.com Ratings.