If you want to invest in the stock market, you need to know about stock market trading rules and what they mean for you. After all, stock trading is a highly regulated affair; going in without a decent working knowledge of the rules and regulations that govern trading is a recipe for serious complications. Plus, you’ll need to have basic guidelines down to govern your trading so you make smart, informed choices instead of potentially-costly trades.
Here, I’ll provide a rundown of rules and guidelines for trading in the stock market, and give you a good perspective of what is allowed, what requirements there are to trade, and – just as important – what guidelines you need to follow in order to have success in the market.
Legal Rules for the Market
We’ll start off by talking about the rules that exist that govern stock market trading in general. To open and trade in an account by yourself, you have to be 18 years of age in the United States. You can have an account in your name opened for you by your parents, but they have to actually allocate resources and make trades.
Other than that, though, all you need to trade is an account and funds to place in the account.
The biggest rule in stock market trading involves insider trading, or, using information that isn’t public in order to make a profit in the market. If you or someone you know has information that the public does not have access to, and you make a trade based off that knowledge, you could be guilty of insider trading – which can carry with it imprisonment (although usually you pay a civil fine equal to one to three times the amount of the profit you made illegally).
There are plenty other rules in place, both created by the federal government and created by stock exchanges like NYSE, and it is always helpful to review these rules so you have a good grasp on how the market is regulated today.
Rules for Successful Trading
Not e that following these rules doesn’t guarantee that you’ll succeed at the market. As with anything, really, success comes down to individual situations, which means you’re the only one who can impact how you make or lose money in the market. With that being said, these rules can help provide you with a great framework for making smart choices and keeping yourself on the right track.
Diversification is one of my biggest rules. This means not to put all your eggs in one basket. Pouring all of your investment funds into one stock is creating risk for yourself if the stock drops. If that occurs, your entire investment takes a hit. By contrast, if you were to spread out your funds across, say, 20 stocks (the minimum number for optimal diversification), you would be able to mitigate some losses and make up for them with other gainers for the day.
Look at General Electric (GE). The company, the third largest in the world according to the Forbes Global 2000, operates in four different segments: energy, technology infrastructure, consumer & industrial, and capital finance. GE owns NBC. It builds nuclear power plants. It also makes appliances for your home and finances capital projects. By diversifying across a wide range of industries, GE is far more insulated from the downturns of a normal economy than, say, a company that only sells computers, or only makes cars.
Your portfolio should be the same. Pick stocks that are in different sectors and industries. Look to balance your portfolio so if one or even two sectors take a hit, the rest of your stocks cut your losses.
Learn Your Orders
You have a wide array of order types at your disposal when you trade. Not every order has to be a market order – nor should it. You have limit orders, stop loss orders, fill-or-kill orders, trailing stops, and a wide variety of other combinations you can use to survive and thrive. For example, a stop-loss order should be placed when you enter in a position, so you can cut your losses well before a stock goes completely south on you. If you are making a profit, move your stop-loss order so that you at least break even if the market turns.
You will lose money on a trade every now and then. It’s a guarantee. It’s up to you to determine how much you’ll lose when that happens.
Create a Strategy
Don’t go into the market with an ad hoc approach. Know what you want to do and how you want to do it – and stick to that plan unless events say otherwise. If you suspect your strategy may not be working for you, change it – but that doesn’t mean get rid of a strategy altogether. Create another one, and another one, until you have a plan that provides results for you.
If you fail to plan, plan to fail.
Limit your losses to a certain percentage of your capital – say, 2% of the money you have in your account. When you hit that 2%, get out – you can always get back in later, and by getting out you are cutting your losses right then and there instead of letting them grow.
If your investment turns south, don’t bank on it reversing itself. Get out of that position until you see signals that it is going to return to positive territory – then get in again. Losing 2% every now and then is not going to break you. Losing 20% – or 50% – or 75% – will, guaranteed.
There are many other rules that you’ll learn as you trade, but the most important ones are the rules you set for yourself. Create a plan, be disciplined, learn how to navigate the market, and keep your eyes and ears open for learning.