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How to Start Investing

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ChartsDid you decide that this year you would start saving more and making your money work for you? That’s a great resolution but in order to do that, you’re going to have to go outside of your normal bank account and become an investor. Often, that means investing in stocks but before you put your money to work in the stock market there’s a lot to learn. Losing money in the markets is a lot easier than making money so let’s go in armed with knowledge.

Although not a hard and fast rule, it’s best to save $5,000 or more before putting it in the stock market. This allows you to diversify your portfolio without the broker commissions eating away a large portion of your gains. If you don’t have that much money ready to deploy, keep reading but start saving. We aren’t going to head to the market just yet, there are a few more steps to take before putting real money to work.

Learn About the Markets

Learn about the stock markets and how they work. Know what it means to own a share of a company and what causes the price of a stock to go up and down. The short version is that owning stock means you own a company and prices go up and down based on supply and demand. After you gain a basic understanding of the markets, learn how to evaluate the health of a company. Learn how to read a balance sheet, income statement, and their annual report. Understand what the P/E ratio, beta, and PEG rates mean? Finally, learn some basic chart reading skills.

Seem a little overwhelming? It will take time to learn everything you need to know but isn’t that true of everything? If you want to do it right you have to put in the time.

Fake Money!

There’s no reason that you can’t put some money to work in the stock market today. In fact, give yourself a $10,000 loan and trade on paper. Sites like Yahoo! and Google allow you to set up virtual accounts where you use virtual funds to invest. If you make a mistake, (and you will) you only lose fake money, not real money. What you gain is an education and experience that is every bit as valuable as all of the reading you’ve been doing to learn about the markets.

Ideally, trade virtual money for one year before putting real money to work. Markets and each individual stock have a personality of their own. As you spend time buying and selling stocks, you’ll learn to find these behaviors. Don’t be in a rush to use real money, you can afford to wait a year.

Other Tips

Avoid the weekend seminars that will show you how to make big money because it’s probably a scam. They’ll charge you a “reasonable” price of sometimes more than $1,000. If it worked, everybody would do it and there would be a seminar about it. You can’t be a top producer in anything after one weekend of schooling, unless you’re the one teaching the classes and collecting the fee.

Avoid penny stocks. As a new investor, avoid any stock under $5 and always stay far away from stocks under $1. There’s no doubt that there are some penny stocks that will one day become big companies but your chances of finding them are slim. It’s better to buy fewer shares of a proven, high quality company than to buy hundreds of shares in a penny stock.

Don’t use the investment markets as a casino. If you want to gamble in the hopes of a big payout, go to Vegas. Although a lot of people try to use the investments markets as a way for quick money, it doesn’t work for long term capital growth. Invest with the idea that your money will grow relatively slowly over a long period of time.

Use ETFs along with individual stocks in your portfolio. Studies show that it is nearly impossible to beat the market so purchasing an ETF that tracks the performance of the overall stock market is a great investing strategy.

Try to have a minimum of five types of investment products in your portfolio. Your positions could be two stocks and three ETFs (Learn more about ETFs here) or three stocks and two ETFs or another combination but never put the majority of your money in one product.

Finally

Don’t be in a rush to put your money to work. Wait until you not only feel comfortable evaluating companies but your virtual account shows more successes than failures. Make highly conservative choices at the beginning of your journey.

(Photo: safari_vacation)

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8 Responses to “How to Start Investing”

  1. Glaisne says:

    This just begs for follow up posts that explain the P/E ratio, beta, PEG rates, and how to read a balance sheet, income statement and other fundamentals of a company.

  2. Lee says:

    OR, a better, more immediate method is to find a few great companies with DRIPS available, then you don’t have to worry about fees or finding $5k to start. I put $50/each into 3 different DRIPS a month. They all automatically yank $50/mo. from my checking account without me having to remember to do it. The worst fee is $.25/purchase, so each month I invest $49.75 while paying a $.25 fee. AND, DRIPS will deal in fractional shares AND will automatically buy more stock with all dividend payouts. The auto-purchase really starts creating a snowball effect which is very exciting to see.

    One downside of DRIPS is that they can be a nightmare tax-wise b/c you bought every share at a different price, so you have to make sure you keep up with your end of year statements. But for me, that has become a plus. I won’t touch my DRIPS b/c I don’t want to deal with the capital gains calculation headache, so they are definitely a buy-and-hold item. One day, I’ll hopefully be able to afford to make an account do that calculation for me!!

    • Money Infant says:

      DRIP’s are an awesome way to start investing as are index tracking ETF’s. The author says himself that it is nearly impossible to beat the market averages so why try. With an average annual increase of 9.4% you can do much much worse than an ETF that tracks the Dow.

  3. As a 30 year old, I feel behind because I haven’t started actively investing, but I have been paying off debts, which I view as a negative investment.

    Good advice to here on keeping your powder dry and to resist treating investing like a casino game.

  4. Snakelord says:

    “you can afford to wait a year” – this is horrible advice. Anyone that knows anything about investing knows the sooner you start, the better. There have been many poor articles on this site lately, and this is one of them.

  5. timparker says:

    Snakelord

    Thanks for the comment but that is plain wrong. If you’re going to start investing and you don’t have the knowledge to research companies properly, don’t understand how to set up a portfolio, and have not studied the markets, you will lose the money you immediately put to work.

    You are correct if you are going to trust a professional to manage your portfolio.

    Investors make money by managing risk and the individual investor’s knowledge and experience is one of the risk factors to manage.

  6. timparker says:

    Money Infant

    There’s no doubt that index funds are a great way to invest but as part of your portfolio you want some inflation beating dividend payers so individual stocks and bonds or bond funds along with index funds are a great way to go.

  7. Bradley says:

    Great read. And congratulations if you have come to terms with initiating an investment. Now is the right time to invest. Before you do, however, you should explore the various investment avenues. As you rightly said, it’s always safer to have a diverse portfolio.


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