11 Cardinal Rules for Investing in Stocks

You already know you can make fortunes through the stock markets; that's why you are here, right? But do you think there are rules to this? You don't want to lose the little you earned for not following what has been tested; trust me, I learned it the hard way!

stock price-movement

I have lost, so you won't, and I am here to share with you 11 cardinal rules to trading and being a successful investor in any of the stock markets in the world. In this list, I will borrow advice from the game's veterans, like Warren Buffett, and include some of my best. 

Let's dive in then,

1.      Assess risks before rewards

You must understand first that the markets are volatile and risky; you could lose your money in a whisker. So, before you think of making that call to buy Nvidia stocks, remember Warren Buffett's advice: don't set yourself up to lose money- If potential gains don't outweigh risks, it might not be a worthwhile investment.

My advice: Set realistic expectations. Base decisions on an objective assessment of investment opportunities. Avoid being swayed by best-case scenarios and maintain a practical outlook.

2.      Never Try to Time the Market

I touched on this in another post, but it's very important, so I will redo it. Avoid attempting to predict peaks and bottoms. No one has consistently timed the market correctly, and if someone is selling you for short-term analysis, they will ruin your strategy in the long run. Instead, use the dollar-averaging method to focus on long-term goals rather than short-term fluctuations.

3.      Discipline is Key

Related to the previous point, be disciplined! Stick to your investment strategy and predetermined targets.

Money makes us emotional, and these emotions may be unsettled during market volatility, but adhering to your plan is crucial for success.

4.      Small Beginning, Big Vision

How the plane takes off determines if it will arrive safely; the diagnostics are critical. What I mean is, start small, testing the waters with a fraction of your savings. Research the market about companies gradually and refine your strategy. You'll uncover winning opportunities and develop a winning trading strategy as you gain expertise.

5.      Invest Only in What You Understand

Before investing, consider how a company operates, its strengths, and potential risks. If a business is a mystery, step back. For a beginner, you are best served if you invest in companies you understand and whose products or services you use; don't just buy Tesla stocks because you know Elon Mask. This will help you make informed investment decisions and reduce your exposure to market risk. Do not follow blind trends.

6.      Stay on Top of Trends

Regularly monitor your investments. Stay informed about the global market, business, and political news, and changes that could impact your investment sectors. You can consider hiring a professional to manage your portfolio, but it is not mandatory.

7.      Diversify Your Portfolio

After understanding the markets with a single company, consider diversifying your investment into different sectors. Diversifying does not mean having many stocks but having more quality stocks in other industries that are not closely linked. You could invest in Money Market Funds(MMFs), bonds, precious metals, and stocks. This will minimize your risk exposure due to market volatility.

8.      Own the Business

In a real sense, stocks represent fractional ownership of a business, so Treat them as such. Analyze fundamentals, valuations, and future performance. When investing in the stock market, it's important to analyze fundamentals, valuations, and future performance just like you would venturing into a small or medium business. Go for companies with reputable management, shareholder-friendly policies, and a strong financial position.

One way to analyze a company's fundamentals is to look at its financial statements, such as its balance sheet, income statement, and cash flow statement.

9.      Invest If You Can Afford to Lose

The market's volatility means you could lose money. Like in gambling, only invest what you can afford to lose. Budget and plan your investments wisely, ensuring your survival is not jeopardized.

Having an emergency fund first is a fundamental rule of investing. The fund should ideally be enough to cover 3-6 months' worth of necessary expenses. The funds should be easily accessible so that you can use them to cover unexpected costs, such as medical bills, car repairs, or job loss.

10.  Buy and Go Long

The stock market can be volatile in the short term, but it has been known to deliver positive returns over the long term. 

My advice is to embrace the buy-and-hold strategy. Hold shares until you reach your target profit or period. Stay true to your plan, whether it's a 5% profit or a month-long investment.

Additionally, consider securing your profits to earn consistent income. Given the market's fluctuations, actively trading and realizing profits from time to time can be a wise strategy.

11.  Learn From Your Mistakes

Only a fool doesn't learn; I believe you aren't one. Maintaining a record of your wins and losses can help you identify patterns and avoid pitfalls in the future. By reviewing and adapting based on your investment journey, you can make informed investment decisions and, to some degree, guarantee success. The world is cyclical, and so is life; nothing is new.

That's all for now, but you can share your insights! What's the most valuable rule you've learned in stock investing? Your experiences and perspectives matter, so drop your views in the comments. Let's continue this dialogue on the exciting world of stock market investing.