Four Golden Rules of Stock Market Investing

Stock market investing is not complex. If one follows a few basic rules, thinks independently, and sticks to his investment principles, much money can be made in the stock market.

Here are the four golden rules of stock market investing. Follow them, and you can expect to be financially secure in your lifetime. Ignore them, and you will be laying the foundations of your future financial ruin.

Do not invest in anything you don't understand. This is the cardinal rule of stock market investing. Keep in mind that behind every stock there is a company. In the long run, the value of a stock will correspond to the value of the company that issued it. Thus, you should try to invest only in companies that are almost sure to grow their earnings over the long run, and avoid those companies which are inherently risky or unpredictable.

Be careful about the price you pay. Even when you've identified a wonderful company, be careful about the amount that you are willing to pay to own their stock. If you pay, say 50 times earnings for a stock, then you may have to wait years, even decades before you realize any profit on your investment. Remember: in the investment game, you must try to achieve the highest rates of return, and you can only do this when you find undervalued opportunities. It is not enough to find a great company - you must also find a great buy.

Diversify intelligently. No matter how developed you are with regards to stock market expertise, there is no reason why you should hold only two or three stocks. Indeed, holding so few stocks can be really foolish. If even just one of those stocks encounters some difficulties, your entire portfolio will suffer disproportionately. It is better to have more than five different stocks in your portfolio, so that overall risk is distributed among your picks.

Stop worrying. In the game of stock market investing, there will always be something to worry about. The newspapers will always seem to be foreshadowing something gloomy just around the corner. It could be anything - the economy slowing down, the unemployment rate going up, a real estate bust, even the bad weather. You must learn to ignore most of the bad news. You should take note of them, to be sure, but you should not allow yourself to be driven by neither excessive optimism nor excessive pessimism - both are deadly to your portfolio results.