Mad Money

Cramer: Get an upper hand on the market—my 4 rules to owning stocks

Cramer: Get an upper hand on the market—my 4 rules to owning stocks

Jim Cramer passionately cares about teaching investors what really happens behind the scenes of the stock market, and sharing his personal rules for investing. He wants investors to have an upper hand in the stock market, so that they will feel comfortable doing the homework and picking their own stocks.

So, why even bother owning individual stocks?

"I think this show can play a role in your financial education and get you to the point where you make fewer errors and have more of a chance to make money longer term if you choose to invest in individual stocks as well as index funds," the "Mad Money" host said.

And when Cramer was growing up he had to learn how to invest the hard way. His father, "Pop," worked very hard selling boxes and bags to retailers when Cramer was growing up, and it was tough to save money back then. Pop had money in a bank account, but it didn't pay much interest.

Stocks blessedly stop at zero on the way down.
Jim Cramer
Getty Images

One day Pop announced that he was going to take that money and buy the stock of National Video because Pop's brother had heard from a guy named Jack that it was the next big thing. At first the stock went up dramatically, and Pop was so happy he kept buying more.

Read more from Mad Money with Jim Cramer

Cramer Remix: Time to reassess your portfolio
Cramer: Bought NFLX or TWX on Apple rumors? Get your head checked
The 'Mad Money' wall of shame—CEOs destroying shareholder value

In fact, that was all Pop knew about the stock. He did not follow it intraday and had not researched the company. Eventually the stock started to plummet, and Pop lost everything on the investment.

"All I can say is that I'm glad for two things: one is that Pop never borrowed money to buy National video, and two that stocks blessedly stop at zero on the way down," Cramer said.

Cramer learned a very valuable lesson from watching his father go through this experience. He learned that investors will want to own individual stocks to augment their paycheck, but they must know how to invest in an individual stock if they are going to do so.

That is why he created the following four rules for owning stocks:

No. 1 Tips are for waiters.
No. 2 You must do the homework if you are going to own an individual stock.
No. 3 If you can't do the homework, then own an index fund.
No. 4 If you fear losing money, don't own stocks at all because they will go down as well as up.

His father went wrong by not researching the company and relying on someone else for information on how it was doing. Therefore he was at the mercy of the movement of the stock and he only knew how to buy, not cut his losses.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website?