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Cramer's Golden Rules For Stock Picking

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Cramer's Golden Rules For Stock Picking

There are four golden rules every investor should keep in mind, regardless of income or investment knowledge, CNBC's Jim Cramer explained during his daily "Mad Money" show Wednesday.

1. Don't Buy On A Tip

Cramer recalled a time when his father bought stock of a company called National Video after Cramer's uncle recommended the stock — based on a tip he heard from a guy named Jack.

Cramer's father knew nothing of the company and when it filed for bankruptcy, he had lost his entire investment. Thankfully, though, "stocks blessedly stop at $0 on the way down."

2. Do Your Homework

Investors who want to own individual stocks need to do their proper homework, unlike what Cramer's father did with his investment in National Video. Without the proper research, investors are at the mercy of the movement of the stock.

3. Own An Index Fund

Investors who can't or won't do the necessary homework in individual stocks should consider instead buying actively managed index funds. After all, professional money managers put in their homework to present investment opportunities for investors.

4. Avoid Stocks Altogether

Finally, a simple but underappreciated rule: Investors who fear losing money shouldn't buy stocks at all.

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