If you are looking to become a stock trader in 2012, you’re probably busy reading everything you can in the hopes of being armed with a lot of knowledge before committing money to the markets. That’s a great strategy and there is plenty of information online to help you. Here are a few quick tips to consider before jumping in to the markets this year.

Trade Virtually

If you’ve never traded stocks before, take some advice from those who have many years of experience. They know that losing money in the market is extraordinarily easy but making money is extraordinarily hard. Before you put any money to work in the market, spend a year trading virtually. Virtual trading is when you buy and sell stocks using fake or virtual money. Before computers, it was called paper trading but regardless of the name, the best lessons you learn come from experience.

Those same experienced investors also know the old saying, “the stock market is an expensive place to learn how to trade.” Start with a balance equal to what you believe will be your starting balance when you begin trading with real money.

You can set up virtual accounts through Google, Yahoo!, and many of the discount brokers. These accounts are often free of charge and will give you valuable insight in to the markets.

Stay Away from Cheap Stocks

Investors know that the word, “cheap” means different things to different people. To the pros, a stock is cheap when its price is low relative to its earnings. Apple, trading at around $400 in the United States, is considered cheap by many investors.

Cheap to the amateur trader is different. Amateurs believe that a $1 stock is cheaper than a $20. When you shop at a local store, something that is in the clearance bin in price is only cheap because people don’t want to buy it. Think of inexpensive stocks in the same way. Sometimes good companies have inexpensive stocks but that’s the exception instead of the rule.

While you’re new to investing, purchase less shares in companies that have a record of success instead of a lot of shares in inexpensive names. Buy quality rather than quantity.

Learn How to Evaluate Companies

Do you know what a P/E ratio is and how it relates to the value of a stock? Do you know what the numbers on the company’s balance sheet mean and do you have an academic understanding of what the company does, whom it competes with, and its product pipeline?

Investors who rely on others to do the research for them will lose money. Reading analyst reports are helpful for facts and statistics but their opinion holds little value for you. Before investing in a stock, learn how to evaluate the company. Some people will tell you to only look at the charts and for some investors that works but unless you have a deep knowledge of technical analysis, stick with methods you can easily understand. You might not know what a head and shoulders pattern is on a chart but you know if the world still has a high demand for cholesterol drugs.

Don’t Day Trade

Although a lot of people do it, there are academic studies that prove that at least eight out of ten day traders lose money. We live in a world full of traders but stocks still represent companies and when companies do well, so do their stocks over a long period of time. Day trading isn’t investing, it’s gambling and even with all of the statistics easily available on the internet, nobody knows where the market is going tomorrow or next week.

Find Dividends

It takes far less skill and luck to find a solid dividend paying stock. Investing in a solid company with a proven historic track record of raising their dividend will produce a much higher annualized return than most stock pickers. When you pick stocks for growth, you’re putting yourself up against the pros. When you pick stocks for income (the dividend) that also happen to be fantastic companies, you’re not trying to beat the market. Instead, you’re accepting payment from the company in exchange for using your money.

Bottom Line

Be patient, learn all you can, trade with fake money, and keep your strategy simple. It doesn’t matter how you make money in the markets as long as you don’t lose it. Dividends are boring but they’re consistent. Stock trading is thrilling but not a sound way to make money for most people.

Contributed by Andy at CreditCardCompare.com.au, an Australian credit card comparison website. Click here to visit their website for other articles like this.

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