It doesn’t matter what market you’re entering, whether it’s stocks, bonds, real estate, or futures; there will always be rules and regulations to consider. These guidelines keep things fair and consistent so that the economy stays strong.
The promise of making a small or large fortune in any market has always been alluring, but the volatility of these markets can create confusion and worry without proper guidance. Investors will do well to follow a few basic rules of investing:
Follow SEC Regulations
The U.S. Securities and Exchange Commission (SEC) was formed with three goals: “Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation.” It was formed after The Great Depression to prevent such a drastic crash from ever happening again.
The main idea is that companies that are selling any kind of securities to the public must be truthful about anything relating to their business, securities for sale, and any risks involved in investing. They must also treat anyone buying or trading securities fairly and honestly.
The SEC regulations come in a large document with plenty of details. Study the document carefully and/or discuss the rules with a financial advisor to avoid infringement.
As an investor, you also have an ethical responsibility to blow the whistle on any SEC fraud. Be sure that you have a strong tip and contact an SEC whistleblower attorney to help you report the fraud while protecting your personal interests. If the tip is good, you may be entitled to a reward.
Skip the Herd Mentality
It’s relatively common in investing to put your money in the same investments as others. You heard that your neighbor bought a lot of shares in X company, so you believe it’s logical to do the same. Sometimes, people flocking to buy stocks in a particular business in the early stages can lead to an excellent investment later on.
However, you should not make it a habit to invest in this fashion. Stocks can become overcrowded, leading to a minimal profit or even a loss. Additionally, as you were taught in grade school, just because the crowd is doing it doesn’t mean it’s wise.
One of the best investment rules to follow is to make educated decisions. Never make an investment without doing proper research first, even if you believe you’ll miss out if you take the time to do your homework. The stock market is volatile; your decisions should not be.
Don’t Time the Market
This is another rule that many people follow with little success in the long run. Some people boast that they timed the market and came out on top, but what they don’t tell you is that it was most likely a fluke. The world’s greatest investors, Warren Buffett included, don’t try to time the market because they know it’s futile.
“Nobody has ever done this successfully and consistently over multiple business or stock market cycles,” Anil Chopra, group CEO and Director of Bajaj Capital, told EconomicTimes. “Catching the tops and bottoms is a myth. It is so still today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money.”
You have better things to do with your time and energy, like researching options to make wise decisions on profitable investments.
There’s no better way to control your risk than diversification. “It’s the only investment concept that truly works for everyone,” writes Jim Cramer in his book “Real Money.” “If you can mix up enough different sectors in your portfolio, you can’t be hit by one of the myriad perfect storms that come our way far more often than you would think.”
Diversification simply means that you invest in multiple markets at once. You’ll want to start small to get your feet wet and let your profits build; then broaden your horizons to include more options.
That being said, don’t diversify too early. Understand the markets you’re entering so you can make informed decisions with each investment first. Otherwise, you’ll face more risk than you can control with diversification.
These rules may be simple and clear, but they’ll have the greatest effect on creating low-risk, profitable investments.