Tuesday, January 29, 2008

How To Start Investing In The Stock Market

Learn how to start investing in the stock market.

Beginning investors tend to approach the stock market with great trepidation. It seems so complex. There is so much to learn. So much new terminology - dividend yield, price earnings ratio, net tangible asset backing, short selling, bull market, bear market and the list goes on.

But you want to get started. The guy next door doubled his money in a couple of months. A colleague at work doubled her money in less than a week. Everybody's making money and you feel like you're being left behind.

So where do you start? Well, first I would suggest you make sure that direct stock market investing is for you. Some people just aren't suited to it. There's nothing wrong with that. There are plenty of other options which will give you exposure. Find a good mutual fund for example.

How do you know if you're well suited? I plan on writing a more thorough article on this in the near future (see Stock Market Investing - Is It For You?) but you could start by asking yourself some of these questions. Are you willing to put in the time? Are you comfortable with the volatility you will undoubtedly experience? What is your time-frame (the longer the better)?

Once you've answered these questions and assuming you still want to proceed here are the steps I suggest you follow.

Get Educated In Investment Fundamentals:

If you're going to manage your own portfolio, even with the assistance of a professional, you will need to understand what you are doing. Read some books. Read the financial press - but don't worry too much about what the market is doing from day to day. There are some great resources available on the internet as well. Start noticing the companies around you. Where do you shop? What are you buying for Christmas? Peter Lynch (a very successful fund manager and author of a number of investment books) is a great advocate of this. Apparently a number of his best investing ideas came from observing consumer trends at the grass roots level.

Don't get me wrong - there is no substitute for actually getting in there and doing it. But the more background information you have the better prepared you will be. And this education should be ongoing. There is always more to learn.

Find A Stock Market Mentor:

Find someone you trust who has some investing experience. This could be a friend or a relative or anyone else you feel comfortable with. A mentor can be a great resource. You can get a second opinion for some of your ideas. You may get confirmation that your reasoning is sound or you may get some feedback about things you hadn't considered. It will be a great benefit if you don't have to make your investment decisions in isolation.

Take A Long Term View:

Once you feel comfortable enough to make your first investment, start small and take a long term view. Don't bet the farm your first time out. Even if you've saved up a lump sum to invest, buy stocks a little at a time. This has a couple of advantages.

Firstly, you wont be putting all of your money into the market at the top. What does this mean? Over time the stock market will go up and go down. There are many reasons for this. Investor sentiment, the state of the economy and lots of other external factors all play their part. It's notoriously difficult to predict the direction that prices will take. Very few professionals get it right even the majority of the time so amateurs like us have no chance. But over time if we assume that the market will rise over the long term, which it has historically, then these short term gyrations shouldn't matter to us - provided we didn't put all of our money in at the top.

The other advantage to investing a little at a time is that we will make mistakes. And we will learn a lot from them. But we need to make sure that if we completely mess up our first foray into the market, we'll still have some capital in reserve so we can regroup and try again. Then over time we should build up a solid portfolio diversified not only by company and industry but also by the point in the market cycle at which we made our purchase.

I know this article hasn't covered yet any of the specifics of choosing a stock to invest in - I will cover that in upcoming articles - but hopefully it has given you some things to think about.

How to start investing in the stock market...

34 comments:

Amit said...

Apart from the theoretical knowledge that an investor gains before investing in stocks, the practical changes and lessons get well off while going through the actual process. Each investor always seeks for making profits but 90% of people end up losing to the stock market, however, very few of all the investors realize the "the risk break" technique. There are various investment strategies that contribute highly to the making of loaded returns.

First strategy points towards well-constructed portfolio that takes into account its integrated investments and diversification. The combined asset classes along with properties and equities get a well-refined structure. It always gets a volatile portfolio that has strength to recover fast even if the market is breaking down.

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Shyam Advisory said...

Starting out it is tought to purchase a well balanced portfolio on your own, that is why people end up using Index funds. Trouble with stocks is, if you do not have enough money to spread around to several stocks and industries you're left holding high percentages of your portofilio in a single stock. Spreading yourself thin to diversify with little money will just lead to being eatten alive by commision costs. make suggestions for beginners who want to invest with little money. As I beleive one can not activly trade a stock portfolio with less that $5,000

Thank you,

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Jubin said...

When I buy, the stock goes down. When I sell, the stock goes up. :(

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Tove Nykanen said...

Investing in the stock market is really a big opportunity.But w/out idea about it is such as mess.Being educated about investing will surely lead you in it.

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PENNY STOCK INVESTMENTS said...

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