There is a lot you should think about when choosing a broker. You should never choose a broker based on the recommendation of a website like ours, a friend or anyone else. You should always make your own informed decision. Your trading style and banking preferences will have a large impact on which broker you should choose. The broker that is best for me might not be the best broker that is best for you.

Make a mental list, or a written list, of everything that you want to see in your ideal broker. List the things that are absolutely necessary at the top of the list and things that are a plus but not that important at the bottom. Now that you know what you want you are ready to find a broker, or several brokers, that offers you everything you want. Sometimes you might need to keep accounts with more than just one broker to be able to get the service that you want. This is often the case if you want to be able to trade with some more exotic financial instruments such as digital options or CFD:s as well as more common instruments such as regular stocks.

Here are some things you should always consider when you make a list to help you choose a broker.

• What financial instruments do you want to trade with?
• Which countries do you want to be able to invest in? On which markets?
• How much money are you going to trade with? You should look for a broker that has a pricing structure that is affordable for the size trades you want to make.
• Do you want to have access to a human broker or is online trading enough?
• Do you want any investing tools or software included in the price?
• Do you need real-time information?
• Do you want to have access to an adviser or wealth manager?
• Do you want the broker to offer credit? If so, on what types of financial assets. How high do you want to be able to leverage yourself? IE how much do you want to be able to borrow.
• Do you want to be able to use your investments as collateral for a loan? IE do you want to be able to borrow money that you can withdraw and use for other purchases outside the broker. Some brokers offer very favourable loans that can be used to buy your next car or house using your stock as security.
• How do you want to deposit and withdraw money?
• Is it important to be able to withdraw money quickly?
• Do you want free withdrawals?
• Do you want the broker to be located within a certain jurisdiction?
• Do you want to be able to trade on your smartphone?
• Is there any other thing you need?

It is important to remember that most brokers have several different account types that you can register for. You have to consider all these different accounts in your search for the right broker. If you only look at one of their account, the one they promote most heavily, you might miss the perfect account for you.

Once you have chosen a broker you should always verify that they have a good reputation online before you register and deposit money. It is also a good idea to verify their brokerage license. This way you can prevent being tricked into depositing your money into a scam site. Scam sites are rare but do exist.

Once you have money in your account you are ready to invest.

Common mistakes to avoid

Below I want to address some of the most common mistakes that inexperienced and more experienced traders commit.

Always diversify

You should always diversify your investments. This helps prevent you take a big loss from one unpredictable event. Many investors believe that investing in stocks of various kinds means that they are diversified. It does not. If you want to diversify in the stock market you need to invest in at least 20-30 different companies in different industries. Lower brokerage fees have made it possible to buy just a few shares at the time and you can now be invested in a large number of companies even if you only have a small amount of money to invest.

To be truly diversified you should spread your investments not only over different stocks in different industries but also over other types of financial instruments. To be truly diversified you should build a portfolio that contains stocks, bonds, options, currencies and commodities. The more diversified you are the more protected you will be from the negative effect of random events.

Invest 90% or more of your investments in lower-risk investments.  Use 10% or less for high-risk investments and speculative trading.  When I say speculative trading I am referring to things like forex, CFD and binary options trading.

• CFD trading is banned in the US.
• Binary options trading is legal but is best avoided due to the fact that very few traders make any money.
• Forex trading is legal.  The risk level of forex trading depends on how high leverage you use when trading.  Forex trading on margin can be very high risk but forex trading does not need to be high risk provided you choose to trade using low or no leverage.

Keep the money you might need in liquid assets

You should always keep a percentage of your investments in assets that can be quickly liquidated without any penalty. A good example of such assets includes popular stocks such as Apple and Google. If you have all your money invested in investments with poor liquidity, you might not be able to withdraw money when you need to. This might force you to take expensive loans to cover costs you normally should have been able to cover yourself.

Never invest money you are going to need soon

It can be very tempting to invest money that you are not going to need for a couple of months in the hope of earning a profit. This is not a good idea if this is money you really need. It is true that you can make a profit but you might also lose money and be unable to meet your future obligations. Money that you need in the short term should never be invested. It is better to deposit the money in a bank account where the money is safe and earns a small interest.

You can ignore this advice if you have large investments and are able to raise the money you need regardless of the outcome of the investment. In this situation, it can be a good idea to put the money to work as soon as possible.

Choose a suitable risk level

It is very easy to get tempted by the promise of quick riches and invest in penny stock, binary options and other high-risk investments. Do not fall for this temptation. It is true that some high-risk investments reward their investors handsomely. It is however also true that most high-risk investments end up losing their investor money. For every success story, you hear there will be ten guys that lost everything that you never heard about.

Design a portfolio that contains the right amount of risk for someone in your position in life. The portfolio can contain a small number of high-risk investments but you should never use the stock markets to gamble. If you want to do that you can head to the casino and have more fun while losing your money.

Investing in stocks can be highly rewarding, but it also comes with risks. Choosing the right stocks requires research, strategy, and an understanding of key financial indicators. Instead of blindly following trends or hot stock tips, successful investors tend to be familiar with fundamental analysis and technical analysis, know how to pick up industry insights, and how to evaluate long-term growth potential.

Below, we will go through a few points that can hopefully improve your chances of becoming a long-term profitable stock investor.

The Importance of Defining Your Investment Goals and Developing an Investment Strategy

Before picking stocks, it’s important to determine what kind of investment portfolio you wish to create. Different strategies require different stock selection criteria, and knowing your investment style will help you filter out stocks that don’t align with your financial goals.

• A Classic Long-Term Investment Portfolio
  Look for fundamentally strong companies with steady earnings growth and solid balance sheets.
• Growth Investment Portfolio
  Focus on companies with high revenue growth, innovation, and expanding market share.
• Value Investment Portfolio
  Search for undervalued stocks that are trading below their intrinsic value.
• Dividend Investment Portfolio
  Target well-established companies with a long history of dividend payouts and a strong cash flow.

Note: Day trading and semi-short term strategies are typically not referred to as investing; it is known as trading. Day traders will close all open positions before the trading day is over, while swing traders can hold on for days, weeks, or sometimes a few months. Day traders tend to look for stocks with high trading volume and plenty of short-term price movements. Swing traders look for somewhat longer price trends that suit their trading perspective.

Using Stock Screeners to Filter Potential Investments

Stock screeners are powerful tools that allow investors to filter stocks based on specific criteria such as market cap, revenue growth, P/E ratio, and dividend yield. Popular stock screening platforms include:

• Yahoo Finance Stock Screener
• Finviz
• TradingView
• Morningstar
• Google Finance

Stock screeners help narrow down thousands of stocks to a manageable list that meets your investment criteria. When using a screener, you can apply filters such as:

• Market Capitalization
  Large-cap stocks for stability, small-cap stocks for growth potential.
• P/E Ratio
  A low P/E may indicate undervaluation, while a high P/E suggests growth potential.
• Revenue Growth
  Look for stocks with consistent year-over-year revenue increases.
• Dividend Yield
  For income investors, check stocks with a 3%+ stable dividend yield.

Analyzing a Company’s Financial Health

When you have found a few companies that fit your general criteria, you can proceed to investigate and analyze them in more detail. Reading and understanding financial statements is crucial to determine whether a company is financially stable and positioned for growth.

Here are a few examples of finance figures that should be taken into account:

• Revenue & Earnings Growth
  Is the company consistently increasing sales and profits?
• Earnings Per Share (EPS)
  Higher EPS indicates stronger profitability.
• Price-to-Earnings Ratio (P/E)
  Compare with industry averages to check for overvaluation or undervaluation.
• Return on Equity (ROE)
  Measures how efficiently a company generates profit from shareholders’ equity.
• Debt-to-Equity Ratio (D/E)
  High debt can be risky, while low debt shows financial strength.
• Free Cash Flow (FCF)
  Positive cash flow means the company can reinvest in growth.

Financially strong companies have low debt, high profitability, and positive cash flow, making them better long-term investments.

Keep an Eye on Recent News and Industry Trends

Stock performance can be influenced by a multitude of factors, including market trends, earnings reports, company news, economic factors.

Here are a few examples of points that are good to keep an eye on; both for stock selection and for managing and taking good care of your existing portfolio.

• Earnings Reports
  Exchange-traded companies typically report earnings quarterly. Look for revenue beats, profit margins, and growth forecasts.
• New Product Launches & Innovations
  Are they releasing new technology, expanding markets, or acquiring companies?
• CEO and Management Team
  A strong leadership team often leads to better long-term success.
• Economic Indicators
  Inflation, interest rates, and GDP growth can impact stock performance.

Understand Stock Charts and Technical Indicators

If you’re investing for short-term gains, technical analysis can help identify buy and sell signals.

Examples of technical indicators

• Moving Averages (50-day & 200-day) Stocks trading above their moving averages often signal strength.
• Relative Strength Index (RSI)
  The RSI measures momentum. An RSI above 70 may indicate overbought conditions, while below 30 suggests oversold conditions.
• Volume Trends
  Increased trading volume often signals strong investor interest.
• Support & Resistance Levels
  Look at historical price points where stocks bounce or struggle to break through.

Technicals are less important for long-term investors, but for short-term traders, they can help optimize entry and exit points. Just like fundamental analysis, technical analysis is not easy, and a trader will need to devote time and energy to learning how it works. It is also very important to understand which technical indicators that are useful for your specific trading strategy. Technical indicators will normally work best when analysed within in context; it can be very dangerous for your bankroll to get obsessed with a single technical indicator and trust it blindly when making trading decisions.

Diversify Your Portfolio

It is not a good idea to put all your money into one stock, one industry, or even one geographical market. Diversification helps reduce risk and can improve overall returns over time, because well-diversified portfolio protects against market volatility and downturns that disproportionally hit a specific company, sector, geographical market, etcetera.

• Invest in different sectors (e.g., tech, healthcare, finance, consumer goods).
• Mix growth stocks, value stocks, and dividend stocks for balance.
• Consider funds for built-in diversification. This can be especially useful if you only have a small amount of money to invest and therefore find it difficult to buy shares in a lot of different companies. A common beginner mistake is to take your starting capital and pour all of it into a single company, thinking that you will diversify along the road. If something hits that specific company during the early stage of you investment journey, it will be a huge blow to your portfolio. By buying fund shares instead, you can obtain diversification from day one.

Examples of sectors

A common method for picking stocks is to look for fast-growing industries that outperform the broader market right now but also have long-term growth potential. Here are a few examples:

• Tech and AI Stocks
  Companies focused on artificial intelligence, cloud computing, and cyber security.
• Healthcare and Biotech
  Advances in bio-pharmaceuticals, medical devices, and healthcare tech.
• Consumer Goods and E-Commerce
  Companies with strong brand recognition and digital presence.
• Financial and Fintech
  Banks, payment processors, and digital finance firms.

Picking the Right Broker

It is important to pick a broker that aligns with your investment strategy. You want a broker where you will get access to suitable investments, and where the costs associated with your strategy are as low as possible. You also want the broker to be reputable, hold applicable licenses, and have a stellar reputation among investors. Make sure the support department is easy to reach and can resolve issues quickly.

Test Your Strategy with a Free Demo Trading Account

Before committing real money, practice investing using a demo trading account filled with play money. A lot of different brokers and platform will allow you to open a demo account for free, without having to make any first deposit. The demo account will come filled with play-money, which you can use to make play-money trades on the platform, simulating a real trading experience.

Examples of why it is a great to use a free demo account:

• You get to test different stock-picking strategies without financial risk.
• You can fine-tune and adjust your trading strategy before you put any real money on the line.
• You become familiar with the trading platform. It is better to do the beginner mistakes with play-money than with real money.
• You can notice if the trading platform is wonky or unsuitable for your needs, and go hunting for a more suitable one. Since you have made no first deposit yet, cutting ties with a poorly performing trading platform will be effortless.

Be suspicious of brokers and trading platforms that you are not allowed to explore for free using a demo account. Sometimes, it is because the broker/platform knows that what they have to offer is not very good, and they want to ”lock you in” with a first deposit before you get a chance to learn about the platform issues.

Why Are Dividend Stocks So Popular Among Long-Term Stock Investors?

When investing in stocks, many people focus on growth stocks—companies expected to increase in value. While growth investing can be profitable, dividend stocks offer a powerful alternative that provides both income and long-term wealth growth. Dividend-paying companies distribute a portion of their earnings to shareholders, making them an excellent choice for steady income, financial stability, and compound growth through reinvestment.

Dividends account for a significant portion of stock market returns – Over the past century, dividends have contributed 40% or more of total stock market gains. Examples of companies with a long track record of paying dividends are Coca-Cola (KO), Johnson & Johnson (JNJ), and Procter & Gamble (PG).

Important: Even a company with a long history of paying dividends can stop paying dividends, or reduce the amount. There are no guarantees. Dividend-payments are suggested by the management team but must be approved by the shareholder meeting to actually be carried out.

Passive Income: Get Paid Just for Owning Shares

Dividend stocks provide consistent cash flow, allowing investors to earn passive income without selling their shares. Whether you’re retired and need regular income or simply looking to reinvest dividends for long-term growth, dividend payments can boost your total returns over time. Quarterly or monthly payouts allow investors to supplement their income or reinvest for compounded growth.

Protection During Market Downturns

Dividend income can be especially valuable during market downturns, as it provides returns even when stock prices are stagnant or declining

Stability and Lower Risk in Market Volatility

Dividend-paying companies are typically well-established and financially stable companies with a track record of consistent earnings. This makes them less volatile than high-growth stocks that can experience extreme price swings. Companies that pay dividends often have strong balance sheets, reliable revenue, and long-term profitability. Many dividend-paying stock companies belong to defensive sectors like consumer goods, healthcare, and utilities, which tend to perform well even in economic downturns. For investors who want steady returns with lower risk, dividend stock can provide a safer investment option compared to speculative stocks. While high-growth stocks may offer short-term excitement, dividend stocks provide long-term consistency and superior risk-adjusted returns.

The Power of Dividend Reinvestment (DRIP)

One of the biggest advantages of dividend stocks is the ability to reinvest dividends. In some juriscitions, it can even be done through an automatic Dividend Reinvestment Plan (DRIP). Instead of taking cash payouts, investors will buy more shares in the company with their dividends, leading to compound growth over time.

Example of compounding with reinvested dividends:

1. Suppose you invest $10,000 in a stock with a 4% dividend yield.
2. Instead of taking the $400 payout in cash each year, you reinvest it into more shares.
3. The more shares you own in the company, the more shares you have that will recieve dividend payments. A person owning 200 shares will get twice as much as a person owning 100 shares.
4. Over 20+ years, your investment could grow exponentially due to dividend compounding.

Even if a stock’s price doesn’t increase dramatically, reinvesting dividends can significantly boost total returns over time.

Dividend Stocks Outperform the Market Long-Term

While nothing about the future is guaranteed, studies based on historic price developments show that dividend-paying stocks tend to outperformed non-dividend stocks over the long run. Companies that pay dividends tend to be well-established, disciplined with cash management, and focused on sustainable growth.

The so-called Dividend Aristocrats – companies have increased dividends for 25+ consecutive years – have outperformed the broader market over decades. Examples of dividend aristocrats are

McDonald’s (MCD), PepsiCo (PEP), and 3M (MMM),

Protection Against Inflation

Inflation erodes the purchasing power of cash over time. Dividend stocks offer a natural hedge against inflation, as many companies increase their dividends year by year, and payouts tend to keep up with or outpace inflation. Companies like Johnson & Johnson (JNJ) and Procter & Gamble (PG) have raised dividends consistently for decades, ensuring that investors’ income keeps pace with inflation.

Instead of keeping your resources as cash, which will decrease in purchase power during periods of inflation, investing in dividend stocks gives your assets a better chance to grow. Dividend growth stocks allow investors to earn a rising income stream while also benefiting from potential capital appreciation.

Better Retirement Planning and Financial Independence

Many investors use dividend stocks as part of their retirement strategy because they offer a reliable income stream. Retirees can live off dividends without selling stocks, ensuring that their portfolio lasts longer. For individuals pursuing financial independence, dividend stocks can create a self-sustaining income stream that covers living expenses without needing a paycheck. Unlike bonds, many dividend stocks offer growing income streams, meaning investors worry less about stagnant returns.

Why Should I Avoid Penny Stocks?

Penny stocks are stocks trading at very low prices. There is no strict universal definition of how low the price has to be for something to be considered a penny stock, and other factors can also play a role, e.g. liquidity. For a beginner, a good rule of thumb is to consider all stocks that trade for less than $5 per share penny stocks and stay away from them. (A more experienced trader can do a more complex judgment call when it comes to low-prices equity.) The $5 rule is currently how the U.S. Securities Exchange Commission (SEC) defines penny stock, provided that the shares are also not listed on any national exchange and fails to meet certain other specific criteria.

Despite being generally unsuitable for beginners, penny stock trading is often marketed as a part of get-rich-quick schemes targeting individuals with little or no trading experience. These schemes attract traders with the promise of huge returns, but the reality is that most penny stocks are very high-risk, really volatile, and often manipulated. While some investors make money on them, the majority lose their investment due to fraud, lack of liquidity, and the unstable nature of these companies. Typically, it is the inexperienced small-scale traders that are left holding the bag when the more savy traders who started the scheme have already cashed out.

Below, I will go through a few points that will help exlpain why I recommend inexperienced stock traders to stay away from penny stocks.

Penny Stocks Are Extremely Risky and Volatile

Unlike well-established companies, most penny stocks belong to small, unproven businesses with little or no revenue. It can also be a company that used to function well, but have now fallen down to the penny-stock level.

Penny stocks tend to have low market capitalization and trade at low volumes, which creates a situation where the stock price can swing wildly—sometimes by 50% or more in a single day Compared to stable companies, speculation rather than fundamentals more easily influence penny stocks, and a lack of reliable financial data makes it difficult to assess the true value of the stock. A penny stock that gets some traction may double in value in hours, only to crash to zero just as quickly. While big price swings may seem appealing, volatility cuts both ways, and the chances of losing money are much higher than making a fortune.

Penny Stocks Tend to Have Low Liquidity, Making Them Hard to Sell

Liquidity is related to trading volume, and impacts to how easily you can buy or sell a stock without significantly affecting its price. Penny stocks typically trade at low volumes, meaning that there may be few buyers when you want to sell, forcing you to accept a much lower price. You could for instance have put a stop-loss at $1, but when the market price reaches $1 and the stop-loss order activates, there are not enough buyers around to purchase your shares, and you end up selling them for way less than $1 – or not selling them at all. You might get stuck holding shares that you can’t offload because there’s no demand.

Low liquidity also means that insiders and schemers can manipulate the price without much effort, making it hard for retail investors to get fair trade execution. An individual does not have to make a very large purchase or sale to quickly impact the market price in a notable way. In contrast, large-cap stocks like Apple (AAPL) or Microsoft (MSFT) have millions of buyers and sellers every day, making it much more expensive and difficult to impact the market value through buying or selling.

Many Penny Stock Companies Fail

Penny stocks are often cheap for a reason—the underlying companies are struggling, unproven, or close to bankruptcy. Unlike established businesses with strong financials, many penny stock companies have no real revenue, profits, or competitive edge. They often operate in highly speculative industries without offering any proven products or services, and they may struggle to access funding and investment from skilled investors, making survival difficult.

Example of a common penny stock cycle

1. A company starts with big promises about an upcoming product or service.
2. The stock spikes as speculative traders buy in.
3. No real progress is made, and investors start losing confidence.
4. The stock plummets, often becoming worthless.

According to studies, most penny stock companies either fail or get delisted—meaning their stock becomes untradeable and investors lose.

Lack of Regulation and Transparency

There are notable exceptions, but penny stocks typically trade on over-the-counter (OTC) markets instead of major exchanges like the New York Stock Exchange (NYSE) or Nasdaq. These OTC markets have fewer regulations, making it easier for fraudulent companies and schemers to operate.

There are fewer protections for investors, increasing the risk of fraud and manipulation. Company information can be misleading, outdated, or incomplete, making research difficult. Without proper financial oversight, investing in penny stocks is more like gambling than investing.

For inexperienced investors, it is best to stick with companies that file financial reports with the U.S. Securities Exchange Commission (SEC) or with an eqvivalent (and reputable) auhtority in another country.

The “Success Stories” Are Rare and Overhyped

Occasionally, a penny stock turns into a major success, and these rare cases are heavily publicized. Everyone, including the media, loves a rags-to-riches story, and it is also a great way for schemers to lure in investors. For every Amazon (AMZN) or Ford (F), which once traded at penny stock levels, there are thousands of failed penny stocks that never made it, and the odds of successfully picking a winning penny stock are not good. For every big winner, there are thousands of losers. Successful long-term investing is about consistently picking good stocks, not hoping for one lottery-ticket win.

It is also important that remember that many so-called “success stories” are misleading, as you will notice when you begin to check the details.

Penny Stocks Are Often Targets for Scams and Manipulation

Penny stocks are easier to manipulate than stocks of larger companies because they have low trading volume and are often traded over-the-counter, which means less regulation and transparency. This makes them a favorite tool for pump-and-dump schemes, where fraudsters artificially inflate stock prices and then sell at a profit, leaving regular investors with worthless shares.

In the context of penny stock fraud, you may also encounter the term microcap stock fraud.

The term microcap stock fraud is used for frauds involving stocks of microcap companies, i.e. companies with a low market capitalization. The U.S. Securities Exchange Commission (SEC) considers a stock company microcap when the market capitalization is below 250 million USD. In many situations, the terms penny stock fraud and microcap stock fraud overlap. In the United States, microcap stock fraud often involves stocks traded on the OTC Bullentin Board and the Pink Sheets Electronic Quotation Service, but frauds have also been revealed involving stocks traded on the Nasdaq Capita Market (formerly the Nasdaq Small Cap Market).

How a Pump-and-Dump Scam Works with Penny Stocks

1. Scammers by a large amount of penny stock.
2. Scammers hype up the penny stock, e.g. through online promotions, newsletters, online forums, or social media.
3. Uninformed investors buy in, driving up the stock price. Some more experienced investors may also join at this stage, knowing it is likely to be a pump-and-dump, and planning to leave very early, far before the peak. Both types of investors help boost the stock price.
4. The scammers sell their shares. This causes the stock price to fall, or at least stop rising.
5. Other investors notice that the price is no longer rising. In desperation, a huge number of shares are dumped on the market, selling at very low prices.
6. Inexperienced investors are typically the last to react, and are left holding the bag. They either sell their shares at a loss, or fail to sell them at all. In both cases, they lose money.

In some cases, inexperienced investors actually buy more shares during point 6, since they are convinced that the dip is just temporary, and that this is a great moment to pick up even more shares for a low price. When many investors act this way during point 6, the stock price can start moving up a bit again, and this makes those investors believe they were right in their prediction. Eventually, however, the price will plummet again.

The SEC regularly investigates penny stock fraud, but new scams pop up all the time. If you see a penny stock being heavily promoted as “the next big thing,” it’s likely a scam.

How a Dilution Scheme Works

A company can repeatedly issues new shares simply to grab more investor money; a practise known as a dilution scheme. Periodic reverse-splitting of the stock is a warning sign.

With a classic dilution scam, the company repeatedly issues a large number of shares into the market using follow-on offerings. There are of course situations new issuing of shares can be legitimate and in the best interest of current share holders, but this is not the case with a dilution scam – the dilution scam only serves to line the pockets of those involved in the scam.

When the share price has dropped down close to the limit below wich the stock is not allowed to trade, you can expect the company to carry out a reverse-split and then start with a new dilution scam.

What to Invest in Instead of Penny Stocks

Instead of gambling on penny stocks, the common advice to inexperienced trader is to consider safer, longer-term investments instead. These investments may not promise overnight rags-to-riches transformations, but they offer consistent, long-term wealth-building opportunities.

Here are a few examples:

• Blue-Chip Stocks
  Large, well-established companies like Apple, Microsoft, or Johnson & Johnson are more likely to provide stability. Some of them also pay dividends, and companies that pay regular dividends (e.g., Coca-Cola, Procter & Gamble) provide passive income and long-term value.
• Index Funds
  Funds can offer diversified exposure to high-quality companies with lower risk. With a fund, you can obtain a high degree of risk-diversification from day one, even if you do not have a lot of capital to invest. Index funds track a specific index and are usually available with very small fund expenses (compared to actively managed funds), which means more of your capital will be left to grow and less will be spent on fund maintenance costs.
• Growth Stocks
  Strong mid-cap companies with proven revenue growth offer better upside potential than penny stocks.

Important: Investing always comes with risk. Even if you invest in a blue chip company or any other type of investment hailed as low-risk, it will not be no-risk.

This article was last updated on: April 3, 2025