Investing novices with a small bankroll often mistakenly turn to penny or other low-cost stocks, thinking they can turn a quick profit by buying a large amount. Low-cost stocks are low because of the high risk involved. Too many investors find the penny stock company closes after a year or two, taking the investor's money with it. Instead, investors with little money to buy stocks should research and buy shares in sound companies.
Start with high-value stocks. Stocks priced at $15 or more are typically from companies that have strong financial portfolios, according to William O'Neil, author of "How to Make Money in the Stock Market." An investor with a small bank account should simply purchase fewer shares of a well-researched, financially sound company. Get company financial reports and use online stock-research sites such as Yahoo! Finance and MSN Money (see Resources) to research investments.
Do your homework. Unlike a roll of the dice in Vegas, sound investing takes skill. It's far from the luck of the draw. O'Neil says that 80 percent of investors lose money in the stock market because they use gossip or tips from "professionals" to buy stock. The other 20 percent, who invest for a living, base their picks on sound research they conduct daily to seek out investments. Make time to research regularly.
Have an exit strategy. If the stock you pick starts going in a negative direction, bail out. Sound investors don't make money on each pick. Instead, when they pick wrong, they cut their losses. O'Neil suggests cutting your losses at 7, 8 or 9 percent, no matter what.
Learn the "3-to-1" strategy. First, invest in a stock until it gains a certain percent, 15, 20 or 25 percent. When it gains the desired percent, take the profits. Secondly, when a chosen stock goes in an opposite direction, cut losses at 7, 8 or 9 percent. Practice this strategy until you average three wins and one loss. This way, you average a profit on your investments.
Study the direction of the stock market. O'Neil says three out of four stocks follow the market's direction. Study stock market indexes such as the Nasdaq or S&P 500, and track whether the market is losing or gaining. Don't be afraid to sit on the sidelines and wait out a market slump. Research and choose stocks to invest in once the market heads upward.
- "How to Make Money in Stocks"; William O'Neil; 2009
- Stock Market Crash image by Paul Heasman from Fotolia.com