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5 Essential Rules You Should Follow While Choosing the Best Trading Stock


Most new traders struggle to choose an ideal stock to trade. Due to the gaining popularity of Exchange Traded Funds (ETF), most beginners tend not to favor buying individual stocks. However, many experienced and self-directed investors still prefer to buy specific stocks for successful trades.

There are similar factors in the stock trading industry that sets the professionals apart from the amateurs. So if you are new to the world of investing in stocks, here are a few essential rules that you must keep in mind.

Buy Stocks With a Good Track Record

Several traders fantasize about purchasing penny stocks of lesser-known start-up companies and watch the stock prices soared within a few months. Unfortunately, that rarely happens in the real world. So if you want to play it safe, make sure that you invest in companies with a consistent track record.

Following this rule may prevent you from investing in new companies. But it can also help you mitigate losses, and that is the first rule of making profits in stock trading. You must be wondering how you can find out if a company stock has a good track record.

The easiest way is to use a stock portfolio tracker to know the past performance of a company. A stock portfolio tracker will show you the historical data with a stock chart and trading figures so you can make an informed decision. Always look for stock portfolio trackers with candlestick charts instead of line charts, as you can find a wider range of information from them.

Invest in Companies Dominating their Industry

You may have noticed that some companies always appear in various portfolios, such as Amazon, Facebook, Apple, Google, and many others. You will find these names whenever you look at index funds, mutual funds, or singular portfolios designed by different investment managers.

These companies dominate in their respective industries because they come up with products or services widely accepted by consumers. All of these companies have the capital, expertise, and resources to design and launch exceptional products or services.

There is no guarantee that their performance streak will never end, but their consistent track record is an indication of a higher probability of success in the future. The company stocks may see some fluctuations in prices, but they have an overall rising trend. That makes these stocks ideal to invest in for beginners.

Look for Companies That Offer Dividends

Companies that offer dividends share a percentage of their profits with their investors, which means they provide immediate returns for your investments. Therefore, you will not have to wait till the company achieves capital gains to make money from your trades.

If you want to make an income out of your investments, choosing companies that offer dividends will give you some security in case of market downturns. Offering dividends are also signs of consistent and profitable companies that can continue their operations as well as expand.

Invest in an Industry That You Understand

Choosing an ideal stock to purchase can be confusing because you can find thousands of companies to trade with on any stock exchange. Look for companies that sell everyday products and services and have a strong brand reputation in the market.

Remember that price and performance of stocks are dependent on the success of the company’s products or services. When a company sells a well-known product or service,  most people will be able to understand the business. There are chances that you may be already using their products, which means you already have a strong understanding of how the industry works.

Alternatively, you can invest in a company with a business that you fully understand because you may be working in the industry or have a passion for it. But make sure that you stay away from businesses that you do not fully understand.

For example, there may be start-up companies that show considerable promise and maybe working on experimental products. If you have no idea about the industry, you may not be able to judge whether the product will become successful or not. So if you cannot completely grasp how a particular industry works, it is best to avoid those stocks.

Do Not Overload Yourself Portfolio With One Sector

You can think of this point as a disclaimer for the last one. While you may want to make sure that you invest in a business you understand, you do not want to overload your portfolio. For example, you might want to invest in tech stocks because you work in the IT industry.

But every company or industry might have to face ups and downs of the trading market. So if you want to hold several stocks in your portfolio, make sure they are from different sectors or industries.

Due to unforeseen circumstances, a particular sector might face a bear market even while the general economy is flourishing. Investing in several industries can save you from financial backlash even if one of them is suffering heavy losses.

Unfortunately, no strategy can guarantee that you will choose only profitable stocks. Sometimes, even the well-thought stock trading plans can result in losses. The best you can do is follow intelligent guidelines while selecting stocks to purchase. If you feel that you are not up for choosing your own trades, you can consult trading experts to get additional help.

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