5 Tips That Will Turn You Into a Smarter Stock Investor

Financial Markets Wall Street
Richard Drew/AP
With the major stock indexes at or near all-time highs, lots of people are thinking about investing in the market –- some for the first time, and some who pulled out and have been waiting on the sidelines since the financial crisis of 2008.

But no matter what your experience level, there are several straightforward techniques you that can help you be a more successful investor. Here are five things you should keep in mind when putting your money to work for you in the market.

1. Start By Determining Your 'Type' and Your Strategy

Before you put a dime into the stock market, it is crucial that you determine what type of investor you are and what your strategy will be.

Are you a buy-and-hold type, in the equities you buy for the long haul, or are you a more nimble investor who tries to take advantage of stocks and sectors while they are hot? The answers to these questions will be crucial in determining how you approach your investing.

If you are a long-term investor, your strategy might be to look at value stocks or growth stocks, always keeping an eye on the fundamentals of the underlying company.

If you are a shorter-term investor, you will probably want to look at technical analysis, a way to use price and volume date to determine when to enter and exit stocks.

But no matter what your style or strategy is, you should always make sure that it is one grounded in sound risk management.

2. Don't Over-Diversify

Though at first this might seem counterintuitive, too much diversification in your stock portfolio is a bad thing. With too many holdings spread out across too many sectors or industries, you will be dependent on the whole market to rise to bring a good return. And though you won't be hurt dramatically if one stock tanks, neither will you benefit it one outperforms the broad market.

Legendary investor William O'Neil, the founder of Investor's Business Daily, suggests that the average investor allocate funds among three or maybe four different stocks at most, and then be hyper-vigilant on managing those stocks.

The trick then is to cut your losers quick, let your winners run and reallocate the cash from your sales into better-performing stocks. This helps make sure you always have the majority of your investing capital in the best companies at all times.

3. Only Invest What You Can Afford to Lose

One of the secrets to successful investing in the stock market is to try to stay as unemotional about your stocks as you can. This allows you to manage your portfolio with a clear head and make changes when needed.

One of the best ways to remove emotions from your investing is to make sure that you never risk an amount that is more than you can afford to lose. The chance that you would lose all your investing capital –- even in the worst bear market -– is pretty slim, but knowing that in a worst-case scenario, you can absorb the damage and come out the other side is reassuring, and will let you sleep soundly at night.

4. Stay Away From Big Bargains

Most of us have a natural inclination to want to buy things when they are cheap. It is something that society instills in us from the time we first learn the value of money. But the stock market works in the opposite way.

Sales occur when there is too much inventory and too few buyers. That is why we look for them when buying a car, or a TV or an appliance. But in all those cases, we're buying wasting assets -– things that are guaranteed to go down in value over time.

In the stock market, what you buy are shares of a company, shares that will be more valuable or less valuable based on the demand for them in the future. Because of this, you want to buy stocks that are currently in demand and that will continue to be.

This often means buying stocks near their 52-week highs. As distasteful as that may sound to some, if you study the history of some of the best-performing stocks, many of them spent a lot of time on the 52-week high list and many were considered "expensive" before beginning their next price ascents.
Stocks near their 52-week highs are in demand and will have a better chance of staying in demand, and thus moving higher, than other stocks.

5. Educate Yourself

There is no better time than now to be an investor in the stock market in terms of the amount of educational and informational resources available.

Fundamental data on all listed companies is free on most of the major financial websites (such as DailyFinance), and you can create stock charts with all sorts of technical indicators on sites such as BigCharts and FreeStockCharts.

For the latest market news you can go to Investors, CNBC, or TheStreet, and you can even create your own personal stocks scans based on both fundamental and technical factors on sites like Finviz.

And just so you know you are not alone, you can join StockTwits -- the biggest online investing community in the world -- for free and interact with investors and traders of all levels of experience.

All of this information allows you to be a more knowledgeable investor, with a better understanding of the stock market, and a better ability to profit from it.

The Lund Loop is a free once-weekly curated slice of what I am writing, reading and hearing about in finance, tech, music, pop culture, humor and the good life. But not sports or knitting ... ever! Subscribe now.

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