Top 10 Trading Tips for Beginner Investors

Published with permission from WallStreetSurvivor.com.

If you've ever wanted to dabble in the stock market, but were wary of going it alone, these 10 tips will help you get you started investing -- and keep you from making common rookie mistakes.

1. Educate Yourself First. You don’t make a major purchase or undertake a new project without doing some research first, talking to those that have experience, trying to educating yourself on your choices, and making sure you understand your options. The stock market is no different -- and there is no shortage of information and advice out there. Start reading as much as you can from as many different sources as you can.

2. Practice, Practice and Practice Some More. Once you feel you have the basics of the stock market covered, practice trading using virtual dollars with an online simulation games, such as the Physician’s Money Digest “Diagnose the Dow” healthcare stock-picking contest. This simulation is as close to trading in the real world as you can get, without risking your real cash. And you could win a new Apple iPad!

3. Don't Put All Your Eggs in One Basket. When you are ready to make your first practice trade, don’t jump in all at once. Ease into the stock you want by buying half of what you want now and the other half in a few weeks. So, for example, if you want to invest $10,000 in Apple Inc. (NASDAQ: AAPL), buy $5,000 now and $5,000 in a few weeks. No one knows what the stock price will be in a few weeks, but by dollar cost averaging like this you will definitely buy more shares at the cheaper price and less shares at the more expensive price -- which is exactly what you want to do.

4. Choose Solid Companies for the Core. When building your stock portfolio, put at least 80% of your money in solid, stable companies that have strong fundamentals, strong technicals, and positive community sentiment. The Motley Fool’s CAPS ratings is one popular indicator of what the overall investment community thinks of a stock.

5. Think in Percentages. As you build your portfolio of stocks, concentrate on the percentage of your overall portfolio you want to invest and don’t focus on the number of shares. For example, one of the biggest mistakes novice investors make is buying 100 shares of Coca-Cola Co. (NYSE: KO) and 100 shares of Google Inc. (NASDAQ: GOOG). Yes, you are diversifying, but you just spent $5,000 on Coke (at $50 a share) and $45,000 on Google (at $450 a share). There is no magic to having 100 shares. If you had $50,000 to invest and you wanted to invest in these companies equally, you would instead buy 500 shares of Coca-Cola and 55 shares of Google.

6. Diversification Is the Key to “Getting Rich Slowly.” Diversification means not putting all of your eggs in one basket. When looking at stocks, pay attention to their industry, market capitalization, dividend yields, international exposure and make sure your portfolio has a good variety of all of these measures. Web sites such as Morningstar.com have free tools that will examine your holdings and tell you how well-diversified your portfolio is.

7. Use Stop-Loss Orders to Protect Your Investment. Never allow yourself to lose more than 8% to 10% on any single stock purchase. Here's how to place a stop-loss order:

a. If you purchased a stock at $10 per share, immediately place a stop loss at $9 a share, that way you are sure to get out of the losing position without a significant loss.

b. Nothing can ruin your overall portfolio return than to have one stock that ends up losing most of your money. Suppose you invest $10,000 in 10 different stocks, and end up with six winners (say, one stock gains 50%, two gain 20%, 20%, and three gain 10%). You also have two non-performers, meaning they’ve gained or lost nothing, and two losers (one stock down 50% and the other 10%). That $100,000 investment would then be worth $106,000. If you had just placed a stop-loss order on the one stock that lost 50%, and limited that loss to just 10%, your portfolio would be worth $110,000. At the end of the year, and over many years, there is a huge difference between a 6% return and a 10% return.

c. Don’t convince yourself that instead of putting a stop-loss order in, you’ll simply sell a stock as soon as it falls below your purchase price. Trust me, you won’t. Stocks generally drop in price much faster than they rise (think Enron and AIG). Either you will have missed your chance to sell without a huge loss, or you will become emotional over the loss and think, “Surely it will recover.” It is very difficult to lock in a loss on a trade and admit that your original decision to buy was wrong. Your emotions will get the best of you. But don't worry, this happens to everyone!

8. Learn and Respect These Market Clichés:

a. The trend is your friend.

b. Ride your winners and cut short your losses.

c. Buy on rumor and sell on fact.

d. Don’t get emotional about stocks, it clouds your judgment.

e. The market overreacts to all news.

9. Don’t Try to Time the Market. It is impossible to buy at the bottom and sell at the top. Instead, be happy if you can buy in the bottom 25% of a trading range and sell in the top 25%.

10. Keep Your Eyes Open for Trends. The trend is your friend. To find young, hot companies all you need to do is keep your eyes and ears open. For example, if you hear your friends or colleagues talking about a new product, you’ll probably listen and then pass it off as a fad. However, if you hear three different sets of people talking about the same product, then you know it could be potentially hot.

As a physician, you have a unique advantage in that you’re immersed in the healthcare, healthcare IT and pharmaceuticals industries. Use that knowledge and experience to profit: If you come across a product or service that works for you, chances are other doctors will as well, and the publicly traded company that produces it may be a winning investment.

Finally, listen to your kids: If they tell you they just have to have the latest fashion, video game, electronic gadget, etc., because “everyone else has it,” research the product maker as a potential investment.