8 Important Tips for Investing in Stocks

Vault’s Viewpoint

• Improve your chances of long-term success by researching your investments and sticking to a strategy that works for you.
• Some of the best tips for investing in stocks include a straightforward approach that doesn’t include looking for hot tips or getting emotionally involved.
• While you might want to avoid using AI to pick your stocks, it can be a useful research tool and help you identify some potential additions to your portfolio.

1. Practice and Simulate Real Trading

Even experienced investors and traders can benefit from simulated trading. Some of the best stock brokers offer paper trading accounts or simulations that let you adjust conditions and test different strategies.

For beginners, a simulated trading account is useful for understanding quotes and learning how to place trades on the platform. Plus, you can see how certain investments might perform. More advanced traders often used simulated trading to test advanced strategies.

2. Diversity Your Portfolio and Explore Verticals

One of the first rules of building an investment portfolio is diversification. When you choose assets from different market areas, you have a better chance of maintaining performance because stocks from some sectors might still gain, even if investments in a different sector drop.

Stocks fall into one of 11 official sectors recognized by the Global Industry Classification Standard (GICS) framework. Within these 11 sectors are 25 industry groups, 75 industries and 163 sub-industries.

For most beginners, starting with sector diversity makes a lot of sense. Here are the 11 sectors:

1. Energy
2. Materials
3. Industrials
4. Consumer Discretionary
5. Consumer Staples
6. Health Care
7. Financials
8. Information Technology
9. Communication Services
10. Utilities
11. Real Estate

Research to find out which sectors are likely to do well at various points in the economic cycle. For example, consumer staples generally do well in a recession because people still have to buy necessary items, while stocks in the consumer discretionary sector might drop. Understanding how these sectors work in an economic cycle can help you decide when to buy and sell, and what mix makes sense for your portfolio.

3. Thoroughly Research and Perform Due Diligence (DD)

One of the most important tips for investing in stocks is to do your research. Trying to find the best stocks to buy isn’t as important for index investors. You can choose a couple of indexes that fit your portfolio strategy and be done. But if you pick stocks, due diligence is a huge part of choosing what to add to your investment portfolio.

Learn how to read a company balance sheet and understand earnings reports. Dig into historical performance and take into account various measures of value, such as P/E ratio, debt to equity, dividend yield, return on equity and other terms. Decide which items are most important to your strategy and portfolio goals and apply them consistently when evaluating stocks.

4. Buy High and Sell Low

This concept is a foundation of stock investing. But it might seem easier said than done. You can’t truly time the market or predict when a stock will hit its peak or its lowest point.

But it’s possible to increase the chances that you’ll be able to sell your stocks for higher than you bought them by considering the following principles:

• Buy more shares during a stock market downturn, when they are “on sale.” Consider selling at a profit after the market recovers—as long as selling fits your long-term portfolio strategy.
• In the short term, consider the best growth stocks for investment. You know you’ll sell these stocks within five years of buying them at a potential profit.
• For long-term investing, look for value stocks. These are stocks that are undervalued compared to other investments in their sector and that you can hold onto for a longer time and see likely profits.

5. Develop Your Strategy and Stick to It

You might be surprised at how many investors never develop a portfolio strategy. Think about what you want your portfolio to accomplish on your behalf. Are you trying to build a nest egg? Do you want to use investments as part of a travel fund? The purpose of your portfolio can help you develop the right strategy for your situation.

Depending on your goals, you might adjust your asset allocation, decide when to buy or sell shares, and make other important decisions. Some basic approaches include dollar-cost averaging, buying in thirds, and automatic dividend reinvestment. Decide what will help you reach your objectives and stick to your strategy. This will prevent you from panicking and selling at the first sign of trouble and potentially locking in losses.

6. Let Winners Run, Cut Losses Early

Frequent trading is a fast way to lose money as an investor. There are two main temptations as an individual stock investor:

1. Taking small profits as soon as they appear, missing out on potential gains later.
2. Holding onto losing stocks, hoping they will eventually turn around and become profitable.

If you’ve developed a portfolio strategy and done your due diligence, you should be able to identify when to hold and when to cut your losses and move on. If you have a winner and the fundamentals haven’t changed, consider letting that winner run a little longer to capture higher gains. Just make sure you sell at the pre-identified level. On the other hand, if you made a mistake or the fundamentals have shifted, don’t fall prey to the sunk cost fallacy. Accept the losses and choose something else to make up for it.

7. Avoid the Emotional Investing Trap

It’s easy to get caught up in the excitement of a hot stock or panic and sell at the first sign of trouble. Whether motivated by excessive exuberance or fear, emotional investing moves you away from the dispassionate evaluation of your portfolio and the stocks you choose.

Identify your entry and exit points for a trade and stick to them. If you have a framework for evaluating investments, don’t throw it overboard because people on Reddit are pushing some meme stock. Don’t abandon your long-term portfolio strategy during a downturn. You’ll likely come out ahead in the long run when you stick to your plan, especially if it’s been developed with care and research.

8. Remember You Have To Pay Taxes

One of the most overlooked tips for investing in stocks is paying attention to taxes. At some point, Uncle Sam wants his cut of your profits. Remember capital gains taxes, including what you’ll pay for long-term vs. short-term. Understand that you can use tax loss harvesting to sell losers and offset some of the gains from your winners.

If your long-term portfolio strategy includes tax-advantaged investment accounts, learn the rules and the tax implications. For example, your strategy should consider whether you use a traditional account vs. a Roth account, or whether you’re investing money held in a health savings account. You should also understand the tax implications of rollovers and switching your strategy later.