Jim Cramer’s Top Five Stock Investing Tips

Jim Cramer, the controversial host of CNBC’s Mad Money show, is often criticized for his investing advice. However, Mr. Cramer does have a “method to his madness”. Here are five stock investing tips that Cramer recommends investors use when evaluating new stocks.

1. Watch the New 52-week High List
Many of the stocks that become Cramer’s top stock picks are taken from the new 52-week high list. Of course Cramer doesn’t just copy the list, but waits for the stocks to pull back and does additional research on the companies. It’s important to find out whether the stocks are just part of a general bull market rally or whether the individual stocks have merit. According to Cramer, the best stocks on the 52-week high list usually go higher. However, investors shouldn’t just wait for any pullback, but also make sure the stock didn’t pull back for a good reason.

2. Insider Buying Even at a 52-Week High
Insider buying of a stock that has reached its 52-week high is a very bullish sign, because it shows that company insiders do not believe that there will be a pullback in the stock. Of course not all insider buying is necessarily worthy of note. Sometimes it can simply be a confidence game being played by management, but when insider buying is “truly colossal” and the stock has already moved higher, then investors should sit up and pay attention.

3. Insider Buying and a Heavy Short Position
Insider buying and a heavy short position is also a sign to invest. This signals a potential short squeeze. Then the short sellers have to start buying the stock back just to protect themselves. While shorts may be smart, Cramer doesn’t believe that they know more about a company than its own management.

4. Trade Around a Core Position
Jim Cramer advocates that investors “find a stock that you believe will be going higher over the long term.” Such stocks may go up and down on market volatility, but should head up over the long term. For those who own 300 shares of a $100 stock as a trade, Cramer recommends selling 50 shares every time the stock rises 3%, taking some of the profits off the table in the meantime. Then, as the stock goes down, Cramer suggests buying it back in increments, such as purchasing 50 shares every time it falls by 3%. Cramer urges investors not to own less than 100 shares and not more than 300. “The basic idea is to avoid putting yourself in a position where you have too much on the table in case the stock gets swatted down, or too little on the table to take advantage of any upside that comes your way,” said Cramer.

5. The Inevitable Implosion of Hot Stocks
Cramer defines “hot” stocks as small stocks which rise fast, have little research and sparse analyst coverage. These stocks invariably climb too high too fast. Cramer believes the time for investors to jump off the bandwagon is when four analysts are covering the stock.