I remember when I decided that my normal savings account wasn’t good enough any more. I saw that my not quite 2% interest on my savings account was being obliterated by the 5% average inflation rate. By keeping my long term savings in a savings account, I was actually losing money over time, so I set out to learn how to become an equity or stock investor.
As a first time investor, I knew that I had a lot of work to do. More specifically, I had some learning to do. As I gained more experience, I realized just how much we need to prepare before putting any money into the market.
Stock Investing Tips and Advice For The Beginning Stock Picker
1. Keep your investment costs low.
Many investors are paying out too large a part of their returns to investment management fees. By watching your costs when you buy or sell ETFs, funds, stocks, bonds or options, you can actually keep more of your returns to yourself. These days, you can minimize those costs by utilizing cheap online brokers — those brokerages that are low on fees and high on customer service. There are a good number of online brokers that are highly affordable while also providing strong customer support. These stock brokerages offer free tools, educational resources and even a built in online trading community for their account holders. You can check them out further in our brokerage section.
Now if you’re a mutual fund investor, stick to no load mutual funds — there’s no reason to have your money in funds that charge you high loads, exorbitant management fees and 12b-1 fees when there are so many alternatives out there.
2. Increase your knowledge about investing before you do anything.
Before committing your money to investments, spend a lot of time reading and learning about investing and stock picking by visiting online financial resources and reading books, periodicals and other educational material. A lot of free investment videos are viewable in the educational sections of many good broker sites.
Read all of the relevant articles that you can, follow the headlines, watch the videos on CNBC and other financial networks, and devour investing books designed for the beginners. In other words immerse yourself in the world of investing. I didn’t invest a dime until I could actually listen to a couple of hours of CNBC stock market news and coverage, and understand everything they were talking about.
3. Learn how to analyze a stock.
The best way for the average investor to invest in the stock market is usually through mutual funds — particularly through index funds, especially if one is unable to track, manage or follow his or her investments on a regular basis. If you are a passive, long term investor, it’s best if you stick to no load mutual funds, index funds, target funds or index ETFs.
But for those of you who are interested in becoming stock pickers, or planning to add some individual stocks into your portfolio, then look into free stock tools like Morningstar or INO.com’s investment tools to help you with tracking and analyzing your stocks. I don’t think you need to be an absolute expert at stock picking in order to start investing, but you should always know why you are investing in an individual stock.
4. Set up a fake portfolio.
I’d also suggest spending a couple of months with a virtual portfolio. Places like INO.com, Google and Yahoo! have sections that allow you to track your investment portfolio. Again, if you decide you want to own individual stocks, then get into the habit of researching your stocks regularly. You should have some idea about what can affect your stocks before any news hits or anything happens. I would make sure that my virtual portfolio is making some money first (and I understand why it’s doing so) before I play with my real money. Don’t invest your real money until you’re comfortable about making money via your practice portfolio. Here’s our list of virtual trading platforms.
5. Get rid of your credit card debt.
A lot of people don’t realize that if they are carrying debt, it may be best to first retire or control that debt before beginning to invest in earnest. At the same time, although it would be ideal if you had no debt at all, for most folks, being able to get rid of debt completely is just not practical. So if you have credit card debt, be careful — because of the high interest rates on credit cards and the relatively small amount of money that you may be willing to invest as a new investor, credit card interest will easily wipe out your gains. If your annual interest rate on your cards is 15%, there is a very high degree of probability that your new portfolio isn’t going to make 15%.
Statistics show that the average American has $5,000 in credit card debt. If this describes you, you’ll probably be unable to afford investing in stocks while you manage your debt. But I have an investment for you that has a 100% chance of making you a 15% profit. Even better, it’s 100% safe. You can’t lose your money on this investment. What is it? It’s the investment you make by paying down your debt as soon as you can.
6. Start conservatively.
Here’s my last tip: Be aware that as investors, we’re always constantly learning. There is much to learn and we actually don’t know as much as we think we know. So get into stock investing with the right attitude. Make your first investments with the intent of understanding how stocks move in a real world environment. Even more importantly, invest in blue chip stocks that are safe and boring. If you were to play against someone on your first tennis match, would you pick Andy Roddick as your opponent? Don’t get aggressive. Just invest conservatively and learn. There’s plenty of time to make money.
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 20 comments… read them below or add one }
This is some good advice, I just can’t bring my self to start picking and choosing stocks (who has the time?). So for now, I guess I’m going to keep hanging out in an index fund 🙂
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Your post doesn’t address the question of why one would WANT to become a stock picker, especially if one is not an expert investor. For the vast majority of people this is simply a bad idea: even professional investors, such as active mutual fund managers mostly under perform stock indexes. Amateurs stand an even more remote chance…
I fail to see the point of becoming a stock picker – most professional investors (e.g. mutual fund managers) fail to beat market indexes, what chance does the amateur starter investor have of doing better?
Shadox,
I absolutely agree that the average investor (or most investors) for that matter should stay away from picking stocks. But there are some people who actually enjoy it — they say it’s therapeutic. I have friends I’ve tried to dissuade from picking stocks but they go on to do it — my opinions fall on deaf ears. They accept their losses and keep playing the market this way as they find it “fun” even if they lose. For the most part, they do it with money they can afford to lose. I therefore tell them that if you’re going to do something like this, make sure you learn as much as you can and understand the risks involved.
I also know someone who is a master at trading — he’s much more serious about it and does it as a hobby. In my opinion, if you’re going to venture into this sort of trading environment, you must do so at your own risk. I wouldn’t recommend it to most people.
For the most part, I don’t see anything wrong with keeping a very small percentage of your investment funds in individual stocks. If you can cap this at 4% of your total portfolio, then you’ll minimize your risks with stock picking.
I actually still do have a small amount of money in individual stocks; 98% of my stock portfolio is in indexes and mutual funds; and for that 2% portion of my portfolio in individual stocks, I do my best to keep track of what goes on.
What Fine-Tuned Finances said was key: if you don’t have time to devote to tracking stocks, you should not try to pick stocks and instead stick to mutual funds and indexing.
This post is really off the mark. The risk involved with picking individual stocks is way too high for short term savings. Yeah you aren’t making much money in a savings account or CD, but at least you’ll know all your money will be there when you go to pull it out. God, I just can’t imagine suggesting this to any of my friends or family or anyone I care about.
Andrew,
I thinks the issue here was that the writer of this article had long term funds sitting in savings accounts. It was not that they had short term savings in stocks. They decided to move their long term funds into equities.
As far as my personal view on stock picking — I would only suggest this for those people who cap their picks at 4% of their overall long term stock portfolio. There are some people, of course, who prefer to put their entire investment portfolio into individual stocks — that is their prerogative and they either learn the hard way (as most do) that it’s not for them. But a small percentage find some luck doing more active investing/trading and they’re happy doing what they do. As for me, I’m one of those who’ve signed up to be with the indexing/buy and hold/asset allocation crowd for some time now.
If you please, you can consider this article a “devil’s advocate” type of post. When things were great in the investment world, everyone was all for stock picking and Peter Lynch was the man. But I guess with the stock market tanking as it has, a lot of people have become disillusioned and are really maligning stock picking.
I have mentioned ad nauseam in the past that indexing and long term investing (rather than market timing) is the way to go. But we try to cover various viewpoints on this site.
Thanks for all your opinions!
I am glad SVB brings up Peter Lynch. He has written one of the most delightful books on investing – One Up On Wall Street and in that he gives a multitude of reasons why individual investors an do better than Wall Street experts.
I take one example here – A person working at Wall Street runs a big risk if he takes a bet against the market and loses money. His managers would tell him – What were you thinking, investing in this crap when everyone else is not.
At the same time a Wall Streeter who was not investing in Real Estate in the past few years would have gotten a lot of flack from his bosses as his competitors were making a lot of money whereas he was “hiding” behind safe stocks.
At the other end of the spectrum, if you do the same thing that everyone else is doing and lose a lot of money – you are still safe. Because frankly, who will replace you?
This kind of thing promotes a herd mentality and lowers the chances of making a lot of money.
Individual investors are not scrutinized this way and hence can make a lot more rational decisions.
I am just saying, Wall Street has not gone bust for nothing, give yourself more credit.
I think the point this article is trying to make is, learning how to invest your money in stocks, forex, etc. will give you a greater return then just leaving your money in a bank account. In order to receive greater returns you would have to learn, practice, and fail; in order to be successful.
Thank you for your comments on my article. I enjoy reading what all of you have to say and by talking about all of our different views, it allows us to learn from each other.
This issue is surrounded by a lot of emotion and often that emotion isn’t grounded in fact.
First, the issue with the stock market is that with the advent of electronic trading, the many get rich quick people have turned it in to something not much better than going to the horse track and gambling. They want short term gains and for that reason, try to invest in volatile stocks that almost always will result in a long term loss. Many of you speak of the average investor losing money in the stock market. This is simply not true. The LONG TERM investor does not lose money when they first diversify their portfolio both within their stock portfolio and also within their larger portfolio and pick solid best of breed stocks and take long term positions and weather the storms. I have a large amount of my investment portfolio in stocks and am down as of late but through the life of my investments, I’m up MUCH more than what I would be by keeping it in a savings account.
If you invest in stocks for the long term (by that I mean years) you will not lose money. Everybody loves mutual funds and index funds but what are these funds made of? Depending on the fund, some percentage of stocks and bonds. And while everybody is anti-stock, send me evidence of your 52 week stats and I’ll send you my stock portfolio and I bet they will look very similiar.
By the way, please accept my apologies. In my article above, I misstated Jim Cramer’s book. It is actually, Real Money. His television show is Mad Money.
Thanks for reading
Tim
I find it interesting that portfolio turnover is not addressed. As a stock picker you can be a day trader and actively trade pushing your portfolio turnover well above 100%. Or you can go the route of Mr. Buffett and try to buy low and hold for the long term. I definitely would like to take a stab at picking individual stocks Buffett style, but won’t do so until I have enough “play cash” to invest with.
I’m not into personal stock-picking by any means. Despite having studied and obtaining my series 6 and 63, I only have a very limited and basic understanding of stocks. I didn’t even feel comfortable pursuing my series 7. That said, I’d add to this list of suggestions a consult with a financial advisor. It’s all well and good to immerse yourself in literature and new programs, but to have a conversation with a professional who does this for a living could provide much better insight than reading a book. Not always, and you certainly want to be careful who you pick, but overall I think people forget there are resources available to help them, particularly in their learning curve.
I think a lot of what you say is correct, but I don’t think a practice account is a good idea. There’s a big difference between losing play money and losing real money — you tend to give up at exactly the wrong time with real money, while fake stock picking is way less emotional.
A better kind of preparation: get a Master’s degree. Notice that the returns you get (intellectual, psychic, and monetary) take years to arrive, and that estimating every day what your degree had done for you would be a fruitless exercise. Apply that kind of thought to a portfolio of solid companies bought at low prices (like, for example, the prices you can pay about now), and you’ll do pretty well.
SVB,
Great post! I totally agree with your philosophy about limited stock ownership for everone. I’ve posted a similar sentiment as well http://bootstrapinvesting.com/2008/09/09/why-everyone-should-own-stocks.aspx. For many of us, the best way to learn is by doing. Putting a little skin in the game will go a long way towards helping you understand the long and short term potential of your investments!
Thanks,
Bootstrap
I think it’s crazy to wait until you have paid off all of your debt to begin investing, that could take years for some people. If you have a few hundred dollars and a brain, you are ready to begin. If you hire someone to do it for you, touch base with them every week. If you have mentionable reasoning skills, go ahead and pick your own stocks. I would recommend this especially to great chess players and other strategic thinkers (World of Warcraft, anyone?). You may never play another video game again, at least not within business hours.
Good article – I suggest William O’Neil’s How to Make Money in Stocks for new learners.
At the above poster, it definitely makes sense to pay off certain debts before investing especially if they are at high interest rates because it’s a guaranteed return. If you have extra disposable income and want to practice with small amounts, by all means go for it.
Being a good strategic thinker does not mean you will be able to pick good stocks either.
To become a successful stock investor, keep these ten tips in mind:
1. Know Yourself. What are you trying to accomplish with your investments? What are your specific investment Goals?
2. Understand your Goals. Are you after capital gains (appreciation) or dividends (income).
3. Information. Know where to get useful information. Knowledge is the key to your success. The decisions you make about the stocks and where to invest your money require quality, up to date information.
4. Research. Do your research. Make sure the company that you are considering investing in is a profitable company worthy of putting your money into.
5. Understand how the world affects your stock. The environment in which a stock operates can often determine whether or not the stock succeeds or fails. Politics and economics make the world turn, you should be aware of how they both might affect the company and its stock.
6. Winning stocks are found in winning industries. You will often see stocks of mediocre companies in ‘hot’ markets outperforming solid stocks of quality companies in a ‘cold’ or floundering sector.
7. Understand and Identify Trends. Jumping on the band wagon of a hot industry can often lead to significant returns on your investment. However, you must also realize when the ship is sinking and when to get out.
8. Keep more of the money you earn. Get smart on taxes. Make sure you are knowledgeable on all the tax implications of buying and selling stocks. This will allow you to keep more of the fruits of your labor.
9. Learn to use investment strategies. Study and learn from the pros. How you go about investing your dollars is just as important as how you pick the companies to invest in.
10. Insider buying and selling. Sometimes, what people tell you to do with investments is not as revealing as what they are actually doing with their investments. Check out the company’s officers and find out if they are buying or selling.
Mr/s. Average Joe/Jane Successful Stockpicker, do you actually exist? Can it be done like so many claim it can be done? However modest or grand?
Can some Plain Jane like me successfully pick and hold a few stocks for a modest return? I haven’t invested a dime in trading stocks but I’ve invested a lot of time in the past year reading books, blogs, several different newspapers, listening to money talk shows, etc. I am not too confident to put actual money down– yet.
On one hand is very very possible that I can, one day, make calculated risks on stocks picks -only after- more learning, and learning, and learning. And there seems to be more and more of that learning as I ingest more of this stuff. Then on the other hand I’ll run into a few blog writers, “experts”, financial advisers who will say: Don’t waste your time. People do this for a living. They have far more resources that you have. Do this instead!
I don’t know.
But I do know that forking over my cash to some random advisor, following the cows, falling for some marketing package, blindly following some guys expert tips and not knowing how my money is or isn’t working for me- it just doesn’t sit right.
So I guess I’ll continue to learn. But if you’ve gotten through the first heap of learning and eventually pulled the trigger with some results, please let me know you actually exist.
This is informative Joe, just be careful to give credit where credit is due, I would hate see my work misused, even in a blog.
Great tips for new investors! Once you have a grasp, it’s a good idea to consult with a financial advisor. Many people can only spend limited extra time studying the market but it is a financial planners job to always be aware of the latest news, analyzing it and making informed decisions. Having one on your side is a great tool. Before choosing one, meet with a few until you find one that you are comfortable with. look for signs that they care about you, your money and your financial future – not just signing a new client. Then, keep it touch and always be aware of where your money is. This partnership can be very rewarding! Thanks again for the great tips!