The Best Way to Play the Stock Market

If you want to play the stock market start by earmarking a sum of money for that purpose and open a separate account with a major discount broker. Come up with a simple system for recording each stock transaction so you can tell at a glance what you hold, what you bought and sold, and where you stand for the year.

Now that you are organized and set up to play, there are some rules or guidelines that you should be aware of. Investors who play the stock market and win don't agree on everything, but there are some things that many of the winners do agree on.

Here's the best way to play the stock market based on the best advice I have run across over the past 35 years. Remember, in this game nothing is guaranteed, but the rewards can be huge if you are good at it.

1. Do not day trade in this account. stockstackup.com" title="day trading">day trading is a game of its own, played by those who trade very often and close out positions in order to pick up as little as a few cents a share within a few minute or hours.

2. Limit your holdings to about a dozen different stocks. If you own too many different issues you are likely to just duplicate the results of the market in general. This is not your objective when you play the stock market ... you should be trying to beat the socks off the market averages.

3. Watch your holdings closely. Once again, this is difficult if you own more than a dozen different stocks.

4. Hold your winners, and cut your losses by taking a small loss on the losers. Few REAL professionals disagree with this basic principle. If only one-half of your stock picks turn out to be winners, your gains will outweigh your small losses.

5. Don't try to catch a falling knife. In other words, do not buy a stock when its price is in a free-fall. Momentum is a fact of life in the stock market. As in physics, an object in motion tends to stay in motion until acted upon by an outside force. Wait until market forces halt the downward slide in stock price before you buy.

6. Sell a stock as soon as it fails to keep up with the market averages. If the market in general is moving up with conviction and one of your stocks is not, get rid of it.

7. Give ETFs serious consideration. This is the best and easiest way to play a sector or segment of the stock market. Why sweat over which financial, foreign or basic materials stock etc. to jump on at an instant's notice? Buy the group, and sort out the winners and losers later if time is a factor.

Above all else, keep a firm grasp on reality. You are playing this game in order to win big. I don't care what else you have accomplished in life, you will find this adventure more challenging than you anticipated.

FEW folks beat the market. Few professionals do either.

That's why I recommended up front that you earmark a sum of money in a separate account to pursue this game. Do not bet the farm on your dreams of beating the market, because it's a tough nut to crack. Consider the money in this account as "play the stock market" money. In other words, earmark an amount of money you could live without when you open this account.

Managing your serious money ... your retirement nest egg ... is a totally different game and different rules apply. Personally, I play both ways and have for years; but I make every effort to keep the two in perspective.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com

Tags : Stock Market System Day Trade Alerts Top 10 Mutual Fund Companies How To Build A Wood Shed