Rule #3: Not Buying on IPO Days
Another thing, I like to avoid is buying coveted stocks when they IPO. The reason being with highly popular stocks like FaceBook, Visa & others is that large position are taken by banks and hedge funds prior to the stock even being listed because they are the underwriters. At 930 AM when the stock goes public - money pours in from individual investors hoping to buy the "next gen" company at the basement level - which pushes the stock even further. However, the banks and large holders usually dump the stock raking in 20-30% profits in the matters of minutes leaving the small investors holding the bag. The big guns usually buy in a bit later at cheaper prices and then hold for the long term.
Remember underwriters also have a lock-up period which is a required period in which they must hold stock - after which they can sell. The result is a wave of people dumping stock and the excess supply can drag price down.
Rule #4: Don't buy the yield - buy the company
One thing that without a doubt is appealing about buying stocks is the fact that some companies offer dividends.
However, the yield (% they pay out) varies. A lot of times I have seen people buy companies just because they offered a high dividend yield of 8-10%. The problem here is that when the industry average is 3% - company’s that pay higher yields should raise a red flag. Sometimes a company will issue a high yield just to attract investors before dropping it later after they have you on board. Remember that dividends are paid out from the company’s profits (after taxes) so a company needs to have the cash on hand to pay out those dividends.