The stock market is full of rules — both hard-and-fast regulations that you must comply with as an investor and dozens of best practices to help you maintain a healthy portfolio. For a beginner, getting a handle on the applicable rules can be daunting. Start with these stock trading rules and learn why it’s important to understand them.
Best Practice: Budget
Regardless of your trading strategy and which markets you use, you have to budget carefully. You’ll start by depositing a sum into an account — cash accounts and margin accounts are two of the most popular. Having to separate your funds from personal bank accounts makes it easy to budget, but you also need to be careful about committing your cash into investments. Especially for a beginner, it’s important to not spend all your cash immediately.
The particular rules you follow for budgeting and other practices also depends greatly on the type of trading you do. Knowing how to invest in penny stocks, for example, starts with understanding stock trading rules. Namely, even though penny stocks are cheaper than other shares, you still have to budget carefully and know when to cut your losses. You also have to consider different valuation methods and not just share price. Otherwise, your investments may not be as profitable as you expect.
Best Practice: Know Your Orders
When you’re starting out, you’ll likely place market orders where you simply tell a broker that you want to buy a certain number of shares. But there are more advanced types of orders you can place to help manage your risk as an investor. For example, you can place a limit order where you tell a broker to only go through with a trade once shares are worth a certain amount.
Regulation: Account Requirements
When you do start with an account, you must comply with a few basic rules. For example, with a cash account, you must deposit an amount to pay for stocks you’ve purchased within a few days of executing a trade. You can’t sell the stock until payment is made. Similar rules exist for margin accounts and other types of accounts. With margin accounts, for example, you must deposit half of the stock’s purchase price. You borrow the remaining amount to execute your orders.
Regulation: Market Rules and Reporting Requirements
Every market has regulations that companies must meet to sell shares. There are also special rules depending on the types of shares you want to purchase. Penny stocks, for example, are often posted for sale in over-the-counter markets that don’t have the same strict regulations as securities exchanges and foreign securities exchanges. So, before you make a purchase, check the reporting requirements for companies and other market rules to ensure you spend your money wisely.
Stock trading is governed by lots of rules, and there are plenty of less-formal best practices that you’ll want to follow. Keep researching and practicing, and take advantage of online resources such as investor communities to help you get your bearings as a new investor.
