How to Profit By Investing in Stocks

Many people who invest in the stock market lose because they don't stick to a few very good rules. This article shares these rules as they were taught to me by Frederick James, a very successful private investor.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Some capital to invest
• A computer
• A trading account

1. Evaluate your finances and determine a percentage of your total net worth that seems sensible for you to have placed in investments that have risk such as stocks. A general rule of thumb is that the closer you are to retirement, the less you'd want to have in investments that could go down. And conversely, the younger you are, the higher percentage of your net worth can be in high risk - higher yield type investments.
2. Establish a stop loss point. A stop loss point is a predetermined percentage of how much a stock that you've invested in can go down before you cut your losses and sell. Remember that if you are active in the market you're likely to have both losers and winners. The trick is to minimize the losers without becoming emotional and "hanging on." Many investors choose percentages such as 25% for a stop loss.
   
   At the same time, a stop loss will prevent your gains from being vaporized by sudden drops because the stop loss applies no matter how high the stock grows. Let's imagine that you buy a stock at $50 a share and then it goes up to $100. But, then the market changes again and it starts to drop rapidly. Your shares will be sold at $75 because that's the new stop loss point. So, you will be able to keep a $25 profit for each share.
3. Open a brokerage account. If you don't know much about stocks you might be better off with a full service brokerage where you can be walked through the process of buying and selling. On the other hand if you are an experienced investor you may choose to use a discount broker or online service.

Tips & Warnings

• Investing in companies or industries that you are familiar with is usually a good thing as you know first hand if it's a good company.
• If you want to get detailed information about a public company, they have investor relations departments that will send you very detailed information about the company's financial performance.
• Never invest money when you are being pressured to do so.
• Always evaluate investments carefully because you could lose part or all of your investment.