Go against the grain when buying stocks. If you behave like you’re told to behave you won’t earn nearly as high of a return. There are tons of so called “stock gurus” out there who are happy to charge you money to tell you which stocks they bought so you can buy them after the fact driving up the price (and their profit). I’m far from an expert myself, but using the following principles I’ve managed to make a steady, modest profit on the stock market each month:
1. Don’t take stock advice from ANYONE who has a large audience
While you may think it’s a safe bet to invest in what the guy in the $5000 suit with his own TV show or website tells you to buy, it’s usually a bad idea.
The only reason people profit off stocks is they are hoping to sell it at a later date for more than they paid for it. One of the biggest daily drivers in a stock’s value is its demand. If everyone is buying a stock, the demand goes up and consequently the price goes higher. If everyone is selling a stock, the price usually goes down.
That being said, what do you think happens when Mr. Stock Hotshot tells half the country to buy a stock?
It instantly becomes overvalued as the demand for it surges.
Sometimes you are lucky enough to get in before the demand kicks off, but the only real winner in this situation is the guy who gave out the tip as he (or his investment firm) likely bought up a ton of shares before they told you to buy it, ensuring they got it for a value.
This is how the stock hotshot pays for his private jet. That, and by charging you money to get his “advice”.
2. Sell means buy, sometimes
Most of the stocks I earned a profit on I bought when analysts downgraded it to a sell rating. As explained above, when a stock’s demand falls, panic selling ensues which floods the market with shares and drives down the price. This is a perfect time to buy if the value score is high. Even if the stock was overvalued, panic selling almost always causes the stock to initially over-correct itself. For example, a stock’s actual value might plummet by 10%. Due to panic selling, the price actually drops 12%. If you buy at the right time of day (usually soon after the market opens) you can get it before it dips back up slightly to its actual market value.
3. Stocks are like collectible items.
Vendors who sell items they wish to be collectibles typically make limited productions of each item so that as time goes on they will be extremely rare and hard to find. This often creates an investment opportunity when buying collectible items as they are expected to appreciate in value (Beanie Babies from the 1990s are a great example). The vendors know this and charge a premium for their collectible product, often basing the price on a perceived future value.
Stocks are very similar; while some stocks are traded at their current value, many stocks have future values built into their price. For example, 3D printing and cloud computing stocks (both expected to be the next Microsoft/Google of industries) have grossly over-inflated prices. This is because demand is high based on future perceived value.
It is important to check a stock’s value score to determine whether or not it is inflated. I typically will not buy an overvalued stock, even if it is selling for a deep discount.
4. Defy logic, trade unpredictably
The best time to sell a stock is when noone else is buying it. Since supply and demand have a great impact on price, the best time I have found to buy a stock is when it is being heavily sold (assuming its being oversold for one of these reasons).
5. As long as you break even after trading fees, you’ve made a profit
If a brokerage firm charges you $5 per trade, then the moment you’ve made $10.01 you’ve made a profit. This is important, because selling when you’ve made a small profit can lead to higher overall profits. Think about it like this, the mindset of most investors is to make a long term profit, or to get rich quickly. Thus, they will see they only made $30 profit on a stock after trade fees and hold onto it hoping it gets higher, only for it to drop. Sure they might have $100 or even $500 profit on it if they kept the stock a few years, but by selling the stock a day after buying it (and making $10 – $30) you free up your cash to play with another stock right away.
I usually invest about $500 per stock, and buy when it’s 2% – 6% down, which is how I earn the $10 – $30 back . You won’t always end up making your money back in a few days. Sometimes it takes months to years, and sometimes you may never make it back. Sometimes, you might even lose money if it continues to decline. For me at least, I gained more than I lost. If you look at this page showing my earnings you will see I broke even by quite a bit this year, and that’s if you assume I’ll never recoup any of my losses.
(By Finance editor)
Disclaimer: These methods work for me, but they may not for you. You could potentially lose money in the stock market, but I assume you knew that already.
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