7 Great Tips on Trading Stocks

The internet is an absolute minefield when it comes to stock trading tips. 

When trading stocks you should always exercise caution. 

Consulting a professional is always recommended when it comes to playing in the stock market. However, if you prefer to be a self-directed investor, it pays to know what you're doing. 

These tips below should provide you with some great general guidelines to keep in mind while you're making your investments. 

The stock market can be extremely lucrative, but it can also be one of the quickest ways to lose your money if you don't know what you're doing. 

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Diversify Stock Picks

The number one tip for stock trading is to never put all of your eggs in one basket. 

This means that you never want to invest all of your money in a single stock. The best predictor of the stock market in the world is not right 100% of the time. If you're investing all of your funds in shares of one company, an unforeseen catastrophe in the management of that company could leave you totally broke. 

A good idea is to diversify not just the companies you buy, but also the industries that you invest in. For instance, if you owned shares in all of the automotive companies when the industry collapsed, you still would not be insulated from large loss.

However, by investing in a variety of industries, such as automotive, energy, technology, banking and mining, you can help protect your investments from any downturns in a specific industry. 

Avoid Knee Jerk Reactions

Stocks fluctuate all the time. A small hiccup in the operations of a company, or an unfavorable news story can cause a stock to drop precipitously. However, these small fluctuations are a trap for the nervous investor.

People who who have knee jerk reactions when trading stocks and sell as soon as shares dip are far more likely to lose money over the long term. Instead, stay the course and ride out the little bumps to enjoy long-term growth. 

Beware Specific Stock Tips

If your professional stock broker advises you to trade stocks a certain way, you should probably listen.

However, you have to be very careful of random tips from unreliable, non-professional or online sources.

Usually they have misleading information or an ulterior motive for recommending their strategy for trading stocks, and you're unlikely to see the kind of response from your purchase that you're hoping for. 

Do Your Research 

If buying shares in specific companies, do your research first.

Find out what the company's performance has been like over the long term, and look into its plans for the future. Read the last couple of investors reports that it has put out. Talk to others with more experience in trading stocks and see how they view the company as well. 

Avoid 'Day Trading' 

Certainly, over the long-term you will trade stocks.

However, the lure of 'day trading' is a trap for many. Day traders are those who buy stocks and hold them for a very short period of time, and try to sell them after a small rise in price in order to make a profit.

This is a tactic that rarely works, and those who do enjoy success at it tend to be full-time traders who have all the professional education, experience and financial backing to be successful. For the more casual investor, its a great way to lose some money. 

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Don't Borrow to Invest When Starting Out 

Trading stocks is a craft, art and science.

You have to learn to walk before you can run. Many brokerages offer what is called a 'margin' account. This means that you borrow money from the brokerage to invest with.

However, margin accounts are for experienced investors who have a strong sense of which transactions will be profitable. For the beginner, margin is a good way to lose money faster, and is best avoided. 

Utilize Mutual Funds

Mutual funds are collections of stocks that are managed by a qualified professional. This is a great way to start trading stocks without all of the pitfalls that come with managing your own portfolio.

There are a wide range of mutual funds, many of which are targeted at specific industries. That way, if you have a sense of the types of companies you'd like to be investing in but aren't confident enough to make specific stock picks, you can instead hunt for a mutual fund that aligns with your investing values.