Essential Rules Before Investing

The decision to invest your capital in shares is not one to be taken lightly or in ignorance of the basic principles of sensible trading. In an environment where you can quickly and easily lose all of your invested capital, knowing a few essential, fundamental rules before you trade will help you avoid some of the more common mistakes made by new and inexperienced traders.

Choose A Cost-Effective Broker

When it comes to choosing a share broker, traders are making a decision that can affect the profitability of their trading for each and every transaction they make. The difference between the cheapest and the most expensive brokers in the market is significant, and assuming you're looking for a basic brokerage service, price is an importance basis for comparison. Choose wisely, and take time to research any cheaper alternatives whenever possible - the more you pay for each trade, the harder you need the markets to work for profit.

Education, Education, Education

Don't even think about exposing your hard earned capital to the markets unless you know what you're doing. There's no excuse for ignorance to the markets - if you're prepared to take the risk, at least make sure you're equipped to give yourself a fighting chance. The more you know, the better you're likely to trade and think, and this is one of the only variables you can control about the markets. That's why putting the effort in to researching and learning about the markets and how they function is of critical importance for anyone looking to trade successfully.

Test, Test, Test

Before you take any trading strategy to the markets, it's important to test it thoroughly, ideally in a demo account in order to iron out the creases and learn how to most effectively deploy it in a range of different trading scenarios. There is no substitute for testing on real markets through trading a virtual account, and no better way to establish how well you are trading through a particular strategy or technique before hitting the markets with real capital at stake. Test any new technique, strategy or tip in demo share dealing accounts first, so you can learn from otherwise costly mistakes in a cost-free, risk-free environment.

Assess Risk/Reward

On a per transaction basis, assessing the risk/reward ratio is a crucial first step, designed to highlight whether a particular trade is worth the risk attributed to it. Depending on the type of strategy you use, risk/reward ratios of 2:1 and 3:1 are common, as a means of encouraging investment only in positions that present a sufficiently substantial investment opportunity. Assessing the risks and the potential upsides allows you to determine whether it is an effective deployment of capital, or whether better results could be achieved elsewhere.

Stick To What You Know

Never trade in markets that are alien to you without thorough research. In fact, in most cases, sticking to markets with which you have developed a familiarity is a good idea, allowing you to hone in on becoming an expert, rather than speculating randomly with a lack of knowledge. If you do decide to broaden your trading horizons, it's important to make sure you do so off the back of a strong understanding of the market you're preparing to trade, to avoid taking excessive risks with your capital.

Further Reading: tips for successful share dealing and Investment mistakes to avoid.