Basic Requirements for Trading Stocks

The cost of entering the stock market is simply the amount you are prepared to lose. Controlling risk, having a basic knowledge of investment principles and practicing trades before investing go a long way toward creating the right investment psychology needed for success.

Have a Plan Before You Buy Stock

Purchase stocks with a predetermined plan--a written sequence of actions for researching, buying, holding and selling stocks. This keeps you prepared for unexpected market movements.

Make Each Trade Part of a Portfolio

Know how a particular stock, commodity or bond fits into your overall portfolio plans. Diversify your portfolio by industry and different classes of assets.

Technical or Fundamental Analysis

Trade in the style with which you are comfortable. You can use technical analysis (mathematical modeling), fundamental analysis (balance sheets and factual interpretation of events) or both to form a sound trading decision. You will stay with a plan longer if you understand why you entered the trade.

Limit Risk at the Beginning of a Trade

Buy stocks with a known risk limit. Normally, an 8 percent drop from the purchase price is the maximum loss professional traders will accept. This is a hard (or absolute) level of loss.

Have an Exit Strategy

Know the circumstances under which your stock is for sale. Are you a trader, or are you an owner of stocks for the long term? Know your investment horizon, so gains are less likely to become losses.

Paper Trade Before Investing with Real Funds

Learn about your trading habits by keeping a log of trade entries and exits before you spend real dollars. You will learn quickly and cheaply by making your mistakes on paper and not from your wallet. Investing has a steep learning curve, so practice first.