Three Rules Every Investor Should Know

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Whether you’ve been investing for 30 years, or you’re new to the world of shares, there are some fundamental truths of the stock market that everyone should know.

The line between success and failure in investing can be a thin one. And in our experience, the best way to stay on the right side of that line is to be prepared.

Master these truths, and every market panic, bubble, boom and bust will present you with an opportunity to profit.

Fail to heed these guidelines, and you could be helpless to watch as your wealth disintegrates before your very eyes.

That might sound dramatic, and the last thing I want to do is needlessly scare anyone away from investing!

But here at the Motley Fool, thousands of investors come to us every year with horror stories from before they found our website.

Some of the stories share remarkably similar themes, and could easily have been avoided. So be careful out there, and keep these guidelines at hand whenever the market makes a big move.

1)Never try to “get rich quick!”

Don’t get me wrong -- people invest because they want to make money. And whether you’re investing to boost your monthly income or for capital growth, the stock market offers a variety of opportunities you won’t find anywhere else.

But trying to “get rich quick” in shares is as reckless as running with scissors in your hand. The results are often painful, irreparable and self-defeating.

Despite this, there’s no shortage of temptations from brokers trying to convince you otherwise. You’ll have probably noticed the countless adverts -- on TV, on the internet, even on the front of football shirts -- for short-term currency trading accounts.

According to the Institute of Trading & Portfolio Management, 90 per cent of ordinary investors who open “spread betting” accounts such as these lose 90 per cent of their deposited cash within 90 days.

Gambling, unlike investing, is almost never a smart way to build wealth - and the fast-paced, flashing red and blue lights of “day trading” more closely resemble a Las Vegas casino than investing.

We believe that investors need to think longer-term to grow their wealth, by investing in great businesses, and holding on for the long run.

There are no smart ways to become an overnight millionaire in the stock market. I don’t know about you, but getting rich slowly is good enough for me.

2)”Penny stocks” are rarely ever good investments.

But what separates great businesses and terrible ones?

Generally speaking, we prefer to invest in companies that are very profitable, well-entrenched, and capable of growing their earnings over time.

However, many amateur investors turn to penny stocks - tiny companies where the share price is quoted in pennies - to find the “next hot thing”. Again, the allure can be strong - some penny stocks go up very rapidly, when they become popular with amateur investors.

Problematically though, these penny stocks - often exotic oil explorers or foreign mining companies - are rarely ever profitable businesses. If they were, they probably wouldn’t be penny stocks to begin with. It’s not uncommon for these shares to survive purely by asking their stockholders for hand-outs when they inevitably run out of cash.

Being a long-term investor in companies that perennially lose money - well, you can probably guess the usual outcome in that situation. Stick to companies that have a history of making profits.

3)Never panic when shares go down. Never get greedy when they go up.

This is a quick one, but it may be the most important rule of them all.

When the headlines look grim, and nobody wants to own shares, that’s often the best time to be buying.
When everything looks rosy and people are piling into the market, that’s often a good cue to be cautious.

Incredibly, in bull markets and bear markets, many investors get these two muddled up - they buy high and then sell low. If you can master your emotions in the stock market, and ignore the extremes of optimism and pessimism, you’ll make far superior investment decisions.

If you’re looking for more tips to make money from the stock market, you won’t want to miss our exclusive free report, “Ten Steps to Making a Million”. Download it for free at fool.co.uk/millionaire