There are plenty of risks that come from trading stocks, but before diving into those Cramer wanted to focus on the human risks. As cliché as it sounds, sometimes we can be our own worst enemy.
Therefore, there are two mistakes that every investor absolutely cannot make: buying on margin and using market orders.
Buying on margin, or getting credit from a broker to leverage a stock position, may seem like a great way to boost profits, but Cramer called it “just plain dangerous.” He said you can’t take losses in these situations. Nor can you buy more as your stocks dip lower. And once you’re too deep in the red, the margin calls come in, forcing you to sell your position in order to cover what you owe.
“It’s simply not safe,” Cramer said. “Nobody needs the level of risk—nobody—that margin gives you.”
A market order, which is telling your broker to buy or sell a stock without naming a price, can cost you, too. Because you’re basically telling your broker to fill your order at any price. As Cramer pointed out, you wouldn’t do this at a supermarket – I’ll buy this lettuce at any price? – so don’t do it with stocks. In fact, markets orders are how people ended up selling Procter & Gamble for $38, when it was worth much more, during the “flash crash” on May 6, 2010, when the Dow plunged nearly 1,000 points in a matter of minutes.
The solution here is to use limit orders instead. Tell your broker the highest price you’re willing to pay if you’re buying a stock, or the lowest price you’re will to take if you’re selling one. That way the trade doesn’t happen unless the price is right.
The bottom line: “If you don’t buy stocks on margin, and you use limit orders rather than market orders,” Cramer said, “you will get hurt a lot less than the others who don’t know better.”
(Written by Tom Brennan; Edited by Drew Sandholm)
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