Buying stocks isn't hard. What's challenging is choosing companies that consistently beat the stock market.
That’s something most people can’t do, which is why you're on the hunt for stock tips. The below strategies will deliver tried-and-true rules and strategies for investing in the stock market. (Need to back up and learn some basics? Here's our guide for how to buy stocks.)
One bonus investment tip before we dive in: We recommend investing no more than 10% of your portfolio in individual stocks. The rest should be in a diversified mix of low-cost index mutual funds. Money you need within the next five years shouldn't be invested in stocks at all.
5 stock market investment tips
1. Check your emotions at the door
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.” That's wisdom from Warren Buffett, chairman of Berkshire Hathaway and an oft-quoted investing sage and role model for investors seeking long-term, market-beating, wealth-building returns.
Buffett is referring to investors who let their heads, not their guts, drive their investing decisions. In fact, trading overactivity triggered by emotions is one of the most common ways investors hurt their own portfolio returns.
All the stock market tips that follow can help investors cultivate the temperament required for long-term success.
2. Pick companies, not ticker symbols
It’s easy to forget that behind the alphabet soup of stock quotes crawling along the bottom of every CNBC broadcast is an actual business. But don’t let stock picking become an abstract concept. Remember: Buying a share of a company's stock makes you a part owner of that business.
“Remember: Buying a share of a company’s stock makes you a part owner of that business.”
You’ll come across an overwhelming amount of information as you screen potential business partners. But it’s easier to home in on the right stuff when wearing a “business buyer” hat. You want to know how this company operates, its place in the overall industry, its competitors, its long-term prospects and whether it brings something new to the portfolio of businesses you already own.
» Learn more: How to research stocks
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3. Plan ahead for panicky times
All investors are sometimes tempted to change their relationship statuses with their stocks. But making heat-of-the-moment decisions can lead to the classic investing gaffe: buying high and selling low.
Here’s where journaling helps. (That’s right, investor: journaling. Chamomile tea is a nice touch, but it's completely optional.)
Write down what makes every stock in your portfolio worthy of a commitment and, while your head is clear, the circumstances that would justify a breakup. For example:
Why I’m buying: Spell out what you find attractive about the company and the opportunity you see for the future. What are your expectations? What metrics matter most and what milestones will you use to judge the company’s progress? Catalog the potential pitfalls and mark which ones would be game-changers and which would be signs of a temporary setback.
What would make me sell: Sometimes there are good reasons to split up. For this part of your journal, compose an investing prenup that spells out what would drive you to sell the stock. We’re not talking about stock price movement, especially not short term, but fundamental changes to the business that affect its ability to grow over the long term. Some examples: The company loses a major customer, the CEO’s successor starts taking the business in a different direction, a major viable competitor emerges, or your investing thesis doesn’t pan out after a reasonable period of time.
4. Build up positions gradually
Time, not timing, is an investor’s superpower. The most successful investors buy stocks because they expect to be rewarded — via share price appreciation, dividends, etc. — over years or even decades. That means you can take your time in buying, too. Here are three buying strategies that reduce your exposure to price volatility:
Dollar-cost average: This sounds complicated, but it’s not. Dollar-cost averaging means investing a set amount of money at regular intervals, such as once per week or month. That set amount buys more shares when the stock price goes down and fewer shares when it rises, but overall, it evens out the average price you pay. Some online brokerage firms let investors set up an automated investing schedule.
Buy in thirds: Like dollar-cost averaging, “buying in thirds” helps you avoid the morale-crushing experience of bumpy results right out of the gate. Divide the amount you want to invest by three and then, as the name implies, pick three separate points to buy shares. These can be at regular intervals (e.g., monthly or quarterly) or based on performance or company events. For example, you might buy shares before a product is released and put the next third of your money into play if it's a hit — or divert the remaining money elsewhere if it's not.
Buy “the basket”: Can’t decide which of the companies in a particular industry will be the long-term winner? Buy ’em all! Buying a basket of stocks takes the pressure off picking “the one.” Having a stake in all the players that pass muster in your analysis means you won’t miss out if one takes off, and you can use gains from that winner to offset any losses. This strategy will also help you identify which company is “the one” so you can double down on your position if desired.
» No brokerage account? Learn how to open one
5. Avoid trading overactivity
Checking in on your stocks once per quarter — such as when you receive quarterly reports — is plenty. But it’s hard not to keep a constant eye on the scoreboard. This can lead to overreacting to short-term events, focusing on share price instead of company value, and feeling like you need to do something when no action is warranted.
When one of your stocks experiences a sharp price movement, find out what triggered the event. Is your stock the victim of collateral damage from the market responding to an unrelated event? Has something changed in the underlying business of the company? Is it something that meaningfully affects your long-term outlook?
» More stock tips: How to begin stock trading — and how to survive
Rarely is short-term noise (blaring headlines, temporary price fluctuations) relevant to how a well-chosen company performs over the long term. It's how investors react to the noise that really matters. Here's where that rational voice from calmer times — your investing journal — can serve as a guide to sticking it out during the inevitable ups and downs that come with investing in stocks.