Tamara Wilhite is a technical writer, industrial engineer, mother of two, and published sci-fi and horror author.
Tips on Money Management and Stocks
Ideally, you should never borrow money to invest. Limit stock purchases on margin or with debt. While buying on margin can let you buy it at $40 and sell it at $50 and walk away with $10 profit per share on a good day, a bad call or falling stock can land you thousands of dollars in the whole. This practice is better managed when you promise to buy shares and sell the shares at $50 and then buy them later in the day as the price falls.
To manage your risk, avoid taking out loans from the brokerage to raise the initial funds for stock trading and never borrow from sources like a home equity line of credit or credit cards to invest in the stock market. The profit margin can be consumed by interest payments and lender's fees.
To better manage your cash flow when stock trading, sell losers to raise the capital to buy winners. Or shift money from losers to stable mutual funds to diversify your holdings and lower your overall risk.
Advice on Buying Stocks
The best deals are made when you buy at a low purchase price compared to the historical average of the stock. However, you should not buy stock simply because it has gotten cheaper. After all, the price decline may be caused by falling revenue or worsening management practices.
Review the draw down effect of the stock to determine the most likely time the stock is going to trough or bottom out before you buy it. For example, dividend stocks tend to trough immediately after they pay a dividend as those thinking of selling do so after receiving the payment.
Only buy what you know, have analyzed personally or are going to trade on the advice of an expert. As Dave Ramsey's says, the advice of your broke brother in law is rarely any good, or he wouldn't be broke.
Don't buy penny stocks. They are that cheap for a very bad reason.
Rushing out to buy the hottest stock is usually the wrong decision. The time to buy it would have been before it became hot. If you do own the hot stock, sell it to those chasing the stock value up.
Do not buy stock on an inside tip from someone in the company. This is privileged information, which makes your purchase on inside information illegal.
Dave Ramsey says never to borrow money to buy stocks. If you save up cash to buy the stock, then you will not be forced to sell stock at a loss or lower profit to make debt payments.
Tips on Selling Stocks
Part of a winning stock trading strategy is to dump losers to limit your losses. If the stock has lost half of its value, it would have to double in value to recover its value. If you would not buy the stock today, consider selling it to lock in your losses and free up the funds to invest in something better. Suze Orman recommends selling stocks in proportion to the degree that they keep you up at night; the more you worry about it, the greater percentage of the stock you should sell.
If you become too emotional in a deal, it may be better to walk away. If the thrill of stock trading rivals that of gambling, the search for a thrill may overwhelm the rational selection of a good deal or the willingness to stop bidding up a stock when it is close to crashing in value.
Is the stock offering a dividend? If you own enough stock for the dividend to yield significant cash flow, consider holding on to it to keep these profits. If you are going to sell the stock, sell it before the dividend is paid out since this is when the stock price is lowest. If you are going to buy a dividend paying stock, buy shortly after the dividends have been paid out, since this is when income investors will sell their shares.
Control your risk level by selling high risk investments before investing in a new, high risk investment.
Sell company stock in your 401K or company stock options as they become vested. Use the money to buy more diversified investing options such as mutual funds, bonds or even Real Estate Investment Trust (REIT) shares. You already rely on the company for your paycheck – holding onto large chunks of corporate stock is an even greater risk.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Tamara Wilhite (author) from Fort Worth, Texas on May 19, 2012:
Thank you. I wanted to post common sense advice that wasn't common known, compared to the FaceBook IPO and other latest "hot tips".
Spitfire07 from Calgary on May 19, 2012:
Some good practices included in this hub! Voted Up.