There’s an awful lot of people who want to start trading stocks and would like nothing more than to find something like an “Investing for Dummies” guide so they can figure out how to start investing in the stock market. Learning how the stock market works is a long process and there’s definitely the possibility to lose money while you’re trying to understand how the whole thing works.
One of the first decisions you’re going to have to make as a beginner investor is what kind of company you’re going to use and what level of service suits you best. Back in the day, there was really no option but to go with a full service broker because the Internet wasn’t around just yet. Since it became ubiquitous, one of the major effects has been that anyone with a computer and Internet access has the chance to start investing. Discount brokers such as E-Trade and Zecco have introduced great yet inexpensive services that allow you to do all the investing yourself.
Of course, what that means is that all the research is now your responsibility. You have to learn how to read stock charts, how to read and understand financial reports, and all of that financial literature that’s going to be fundamental for you if you need to make the right decisions to minimize the possibility of you losing money. Those discount brokers just act as middlemen; you save money on your transactions, and you keep full control of your money and where it goes.
There’s that often overlooked too which is nonetheless very important when learning how to invest: we’re talking about an investing budget. There’s really no way to stress this enough: setting spending limits is fundamental because as a beginner investor, it’s easy for you to identify a stock that you think is about to explode and then what happens? You put way more money into it than you can reasonably afford. The best way to prevent that is to set aside an investing budget (say, $100 a paycheck) and invest only $100 at a time. There are several reasons for that.
First off, taking baby steps will save you money. As a beginner, there’s a good chance you’re not too good at knowing exactly what investments are going to perform well (heck, even experienced investors don’t). If you’ve invested only small amounts of money at a time, you won’t find yourself in a situation where you’ve lost money that you couldn’t afford to lose. Plus, by investing small amounts of money over time, you’re actually using a time-tested investing technique called dollar-cost averaging which really lowers your risk in the long term. More on that in future posts.
Secondly, pacing yourself and going through small investments is an incredible learning opportunity, where you’ll gain valuable experience for future big investments. This is a very important step in learning how to start investing in the stock market. Skip it and there’s a good chance that you’ll jump blindly into a bad investment that will hurt you financially and from which you may take months, if not years, to recover.
The third and final tip is something that you will learn to develop over time. You might do all the research in the world and all the numbers add up and everything tells you that this is a good investment; yet a nagging voice tells you that something just doesn’t feel right. That’s your gut feeling. Listen to it. It can also go the other way around, where you have that stock and you just have the feeling that it’s going to do very well. The key here, of course, is moderation. If you’re acting on a hunch, make sure that you’re not betting the farm!
Learning how to invest is a long process, one that actually never ends. The greatest investors still have a thirst for knowledge to they can keep honing their skills and find new, profitable deals. They also know that things will not always go their way and that the key to being a successful investor is to win more often than you lose. That’s what you should also keep in mind as a beginner investor.
Investing 101: How And Where To Find Profitable Stocks
Get ready to start learning about investing. Go to your local library and rent out books about getting started in the stock market. Read about stocks, bonds, and other investment vehicles. Visit the beginner section of major financial sites like Yahoo Finance, Google Finance, CNN Money, and so on. If your budget allows it, take a seminar or a few classes on investing. The more you learn, the better prepared you’ll be.
Set financial goals for yourself that include investing but don’t stop there. Try and put together a comprehensive financial fitness plan that includes getting out of debt and increasing your income. As for your specific investing strategy, make sure you know what your risk tolerance is. This is the first thing that will dictate what your investment strategy is going to be.
Learn how to research individual stocks and also learn to keep on top of news that can affect a whole sector. Learn how to read stock charts, annual reports, quarterly reports, and other documents that publicly traded companies have to file with the SEC. Just remember to periodically step back and not let the abundance of information cloud your judgment, which brings you back to the importance of having a clear-cut strategy.
Invest in what you know. This is pretty much common sense advice. If you know an industry pretty well and know who the best performing companies are, it makes sense that you would invest there. Similarly, if you’re familiar with publicly traded companies in the area where you live that are consistently profitable, it might be a good idea to consider investing in their stocks.
Analyze the composition of the portfolio of successful mutual fund companies. If their portfolio is performing well, it’s because there are winning stocks in there. Pick them out and invest in them.
Diversify. This is also common sense advice. Concentration has its advantages, namely that you can get killer returns if a particular stock or sector gets hot. Conversely, if said stock or sector tanks, your entire investment fund can be wiped out. So as a rule, you want to avoid putting all your money in just one or two stocks, or for matter, just one or two industries. Sure, it will lower your potential returns, but at the same time, you’ll be better protected against market swings.
Save on commissions by using a discount brokerage to buy stocks. As long as you have the time to do your own investment research, are confident in your investing skills, and know that you have to take things gradually, you should be fine.
Buy stocks that you plan on holding on to for at least three to five years, if not more. The simplest way to make money in the stock market, as exemplified by Warren Buffet, is to find winning stocks and holding on to them. Period. So as long as a company’s fundamentals are sound, don’t give in to the temptation to dump the stock the minute it loses a few percentage points. Give it a chance to rise back; chances are it will, if it’s a sound and well-managed company.
Final word of advice: Don’t think that by investing all your money today, you will be a millionaire next month. Invest for the long term, stock market success doesn’t happen overnight.