Stock Trading Rules

Overview

Doing research on a trade.

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Trading stocks requires preparation and technical knowledge in order to be done successfully. There are some rules of thumb that can increase an investor's chances for profitability in the buying and selling process.
Due diligence

Research all aspects of a company before buying or selling a stock. Investors should review a company's prospectus, earnings history and stock performance prior to trading.

Diversification

Compile a diversified portfolio with stocks from multiple industries, domiciled across various regions. If one industry or region falters, there is a greater chance that a portfolio will hold up because risk is spread out.
Simplicity

Buy best-of-breed stocks or companies that are industry leaders. Stocks with a proven history offer more peace of mind. Additionally, don't overload a portfolio with too many different kinds of stocks; instead, become familiar with the financial details of select companies and trade accordingly.
Strategy

Cut your losses. Sell stocks that are spiraling endlessly and hold onto fundamentally strong stocks that are solid performers.
Focus

Put bad trades behind you and try to learn from them. Emotional trading based on frustration or even euphoria can interfere with the focus required to make sound investment decisions.
Warning

Be wary about buying stocks on margin. Stockbrokers might encourage you to increase your "buying power" with a margin account, which adds debt to a trade. But if a trade goes south, an investor is still responsible for repaying the loan.