"[size=0px]With a stock you need to guess well and be lucky because you can lose 100% of your money."[/size]
From what I've been reading you're supposed to limit your risk by using a stop loss that closes out your position when the share price goes the wrong direction too far. You calculate the number of shares to purchase & the distance to place your stop loss according to the size of your portfolio and the percentage that you are willing to risk losing. The amount that you're willing to risk should be between 0.5 to 2%, depending on your risk tolerance and the size of your portfolio. The larger your portfolio the less you should risk.
The explanation that I read last night was that you need keep your losses small by getting out of losing positions early by using a stop loss, and let your winners grow by increasing your position in them as they go up. (It also mentioned using options as a way to limit your risk when increasing your position in winning stocks. But, I need to reread that to be sure I understand how to do it.)
Here's the link to the main page of what I read. [size=78%]https://www.chartmill.com/documentation/stock-screener/127-General-Trading-Tips-&-FAQ[/size] It all seemed to make sense to me, but I'm happy to hear any criticism anyone has about it.
You have completely missed the point.
Yes, you can use limit orders to reduce your risk on individual stocks. However, you have no protection via a limit order if a company goes bankrupt between the close of trading and the start. This is known to have happened. Even if you can sell your shares for pennies on the dollar, you will lose way beyond your limit price. In the event of a dramatic news development (e.g. the designer for an eponymous fashion house dies), a stock price can also plummet quickly below your limit price so that your sell order at 100 per share winds up being executed at say 40.
As pointed out above, you also have the problem of where you then invest your money after your limit order is executed, and if you keep it out of the market how you decide when to get back in.
Big picture: some stocks will do better than the market and some will do worse.
You can gamble (even though the market goes up on average, any stock purchase is a gamble (i.e. not a sure thing, i.e. a probability-based chance at gain)) that an individual stock, or a portfolio of individual stocks, goes up faster than the market on average. You can, alternatively, buy in to the market average via a total market index fund.
If you choose individual stocks, in order to outperform the market you need to overcome your trading costs (there is a spread between the bid price and the ask price, so you are paying above or selling below the true market price, plus you have SEC charges and broker fees), plus you lose some deferrment of taxation (eg. realizing capital gains on execution of a limit order). So on average you will do worse than index funds unless you are a better trader than the average trader in the universe of traders that includes traders for hedge funds, mutual funds, and brokerage houses trading their own accounts, with all their expertise and technology (including high-velocity trading stations to allow for exploitation of small price differences across securities).
As comments from
@PaulMaxime make clear, you also run into the problem of what to do with your winners. There's a strong temptation amongst bettors (oops, sorry, stock traders) to 'let it ride' and not sell any of a winning stock. When that stock is Apple, well that's great and you get a huge payoff (assuming that you do eventually sell before a collapse in the company)... but taking that approach greatly increases your risk profile through under-diversification. Suppose that stock had been Enron. In contrast, with a portfolio of stock and bond index funds and an investment policy statement, you would likely have a regularized process where winners in your asset allocation (e.g. US domestic stocks) would get sold (i.e., 'sell high') and losers (e.g. international stocks) would get new allocations (i.e. 'buy low').
I disagree that making a model for a company is similar to making a model for the US economy. Anecdotally, I know much more about the future of the company I'm CFO for than is possible for one person to know about the entire US economy.
Did somebody say 'insider trading?'
I invest in a few companies and that's worked very well for me.
Have you outperformed the overall market on a risk-adjusted basis?