Investing on Wall Street is one of the smartest ways to build wealth because your money practically works for you without significant effort on your part.
Interestingly, many people have made their fortunes on Wall Street; yet, you’ll equally find a large number of people who have lost fortunes on Wall Street.
What separates the winners from the losers?
One could argue that the depth of your understanding of the markets, the art of timing and knowing how to master your emotions can swing the odds in your favor on Wall Street.
However, irrespective of how well you understand the markets, below are 4 proven rules of investing that can help you survive and thrive on Wall Street.
1. You can make money in both bull and bear markets
You can make money in both bull and bear markets irrespective of the prevailing market sentiment triggering a herd mentality on Wall Street.
Most investors focus on the bull market, they buy stocks at a low price in order to sell when the stock has a higher price. Hence, most investors are at loss on what to do when the share price of stocks seem to be falling left right and center. Short selling is a smart way to make money in bear markets.
Buying undervalued stocks is another sure way to make money (in advance) during a bear market.
2. Don’t buy your shares all at once
When you decide to load up your portfolio with a particular stock, you may want to consider staging your buys instead of buying your stock all at once.
For instance, if you want to buy $100,000 worth of Apple stock, you should considering buying in $10000 batches over 10 weeks/months or $20000 batches over 5weeks/months instead making a bulk 100K purchase.
Staging your buys over time will help you get the best price over time when you factor in the average of your purchase.
Unless a stock is crashing, you should also consider staging your sells instead of exiting your position all at once.
3. Don’t buy damaged companies; buy damaged stocks
When investing in the stock market, you should know now to differentiate between damaged stocks and damaged companies. A damage stock will most likely be an undervalued stock, a misunderstood stock, or a stock that is trading below its fair price because of the fickle nature of Wall Street in responding to news.
A damaged company most likely has a poor product, inefficient management, and clear-cut vision for correcting errors.
When a stock is selling at a “cheap” price, take a moment to consider if the stock is cheap because it is damaged or cheap because the underlying company is damaged.
Tomas Marsh from Weiss Finance posits that “a damaged stock often recovers given enough time (think Microsoft some years back), a damaged company rarely recovers (think Blackberry).”
4. Know when to let winners run and cut losers lose
Wall Street is not a place where you can afford to live with regrets you need to be decisive and be ready to live with the consequences of your decisions.
One of the commonest regrets on Wall Street comes from investors who exited a winning trade only for the trade to go on to become a spectacular winner.
The other coin of the regret is that some investors hold on to a losing trade in the hopes of a rebound only for the stock to be a massive failure.
The key to success is to know when to let your winning stocks run their full course by locking in price gains with options. Conversely, you should stop being emotional and cut losing trades off; losing in some trades is something you should come to expect on Wall Street.
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