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Stocks & Bonds

Cramer's Rules of Order

Jim Cramer's investing know-how.

In his bestseller Jim Cramer's Real Money: Sane Investing in an Insane World, the author lists ten commandments of trading and 25 investing rules to live by. Among the highlights:

Tips are for waiters, not investors. Be careful when someone offers you advice about a stock. If the tipster really knows exactly what will happen, then he or she is probably guilty of insider trading -- and you may be, too, if you take the tip. And if the person doesn't really know what will happen, then he or she should just shut up.

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Buy and do your homework, don't buy and hold. Know what you own and be able to explain it to someone else. Spend one hour per week studying every stock you own. Buying and holding is much riskier than it sounds; the strategy is often an excuse for laziness, ignorance and neglect.

Never turn a trade into an investment. Make a trade because you believe a catalyst will move the stock. If the catalyst doesn't materialize, sell.

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Be humble; don't buy all at once. Recognize that the world is unpredictable. Start with a small position and then hope the stock goes down so you can buy more at a better price.

Don't trade on headlines. The press's initial interpretation is often wrong. This is particularly true of earnings reports. News services are in a rush to beat their rivals. Read the whole news release. Listen to the conference call. Do your homework.

Bulls and bears make money; pigs get slaughtered. Cramer endlessly repeats this saw, which most amateurs routinely disregard. When you have a big winner, take some money off the table.

Don't panic. You may experience temporary emotional relief by selling at the point of maximum pessimism -- but you almost never get a good price. The price of the stock will be higher a day or a week later. That's a better time to sell, if that's what you want to do.

No woulda shoulda coulda. As Cramer writes, "to second-guess decisions is to put yourself in a loser mind-set." Amateurs do this all the time, and as a result, they're more likely to miss the next big opportunity because they're so consumed by regret over what they did or didn't do.