Step 2 - Diversify your Portfolio Invest in an array of companies, not merely one. This ought to be a simple concept to grasp, but many penny stock investors and blue chip investors just don't do it. Be fully committed to investing in a few different niches that you understand something about, and spread your cash around. By doing this, if one smallcap stock drops, others may rise to offset the loss. It's also a good idea to divide your portfolio evenly between blue chip stocks and micro cap shares. The number of companies you own may vary, but if you have more than ten different securities, it may be difficult to track them with proper due diligence. Diversify your stock portfolio but stay focused.  

Step 3 - Use Full-Service Brokers First, Discount Brokers Later When you begin, employ a full-service stock broker so you can pick his brain and get a feel for the stock market and where it's going. Talk to them about what they think is important and get a feel for how they think. Some industries rely heavily on financials for their valuations, while other industries deemed "growth industries may trade more on potential earnings. As you become more comfortable with investing in securities- both small cap and large cap- you can look into using a discount broker. Many traders pay too much for services they don't need or really want. If you know exactly what you're doing, the only real fee you need to incur is to purchase and sell the stock. This can be done most economically through the services of discount online brokers. But remember, don't do this until you are ready. You don't want to be" penny stock wise but pound foolish" to paraphrase a famous English dictum.  

Step 4 - Use it or Lose it - the Stop Loss Order. Many times investors fall in love with stocks they buy and they can't let go. Other times, they become stubborn and defensive about their previous decisions and feel that selling a stock is admitting that they were "wrong"- or worse "defeat". In order to avoid riding a stock down to catastrophic losses, it is best to impose a stop-loss order. This means that if a stock falls to a certain percentage below your purchase price, the computer will automatically sell it for you. A good percentage to trigger the sale is between ten and twenty percent. Can a stock that triggers your stop-loss rebound and have made you a million dollars? Maybe. But you know what? You don't care. If you stay disciplined, you will live to fight another day and eventually get there, rather than get wiped out hoping for a miracle comeback.  

Step 5 - Ride the Winners, but not Forever If you invest wisely in a number of small cap stocks, chances are that a few of them will have breakthroughs and their value will increase substantially. In this case, becoming too attached to a stock can cost you dearly in the long run, if the stocks bubble burst. The best investment strategy is to sell some shares and take some profit, while riding the remainder of your stock investment to greater heights. It's also important to do further research on the stock to find out why the stock is increasing in value. Has the company established a durable competitive advantage? Are there competitive or industry threats on the horizon? Answering these types of questions will determine what percentage of your erstwhile penny stock investment you should sell or hold. ultimately, it is a question of judgement.  

Hopefully, with these five stock investment tips, you can be a more effective investor, but of course, each situation is unique and each person must find their own way in the investment world.