How to Invest in Stocks: 7 Steps to Start Investing
1. SaveBefore you can start investing you need to have money put aside to invest. A typical rule of thumb is that you should already have enough money put away in your savings to live for 6 months before you consider setting aside funds for investing. Luckily, you don’t need to save too much to start as the minimum balances for many online brokerages are low, and sometimes even zero.
2. LearnNow that you have some funds set aside you need to educate yourself a bit on the stock market and what you’re going to be doing.
3. Find and Open an Online Brokerage AccountThe next thing you are going to want to do is set up an online brokerage account. A very useful guide can be found here. When setting up an account you are going to need to assess what kind of investor you are and what kind of investing you want to be doing. This can have a very important bearing on what the costs will be for you to start investing.
4. Assess Your Investment Time Frame and Tolerance for RiskNow that you’ve got some money set aside and a brokerage account open you need to consider how long of a time horizon you want for your investments and what kind of risk you are willing to accept. Long-term investors, willing to hold investments for several years, can typically accept a higher degree of risk as they can afford to ride out the ups and downs of the stock market. If you are going to need your funds again in the short-term (i.e. paying for a child’s college tuition soon) you probably can’t accept a high degree of risk that the funds won’t be available when you need them.
5. Pick your first stocksNow that you know what kind of stocks you are interested in you can begin to narrow down your options as to what you want to invest in. Avoid simply purchasing the latest ‘great stock tip’ or ‘amazing opportunity’ that you hear about or read on a website. Typically organizations are paid to make these tips so while you may get lucky you can also get burned as these are not un-biased opinions. You are going to want to look at the fundamentals of any company you are thinking of investing in. Things to consider are; 1) your overall assessment of the business market they operate in, 2) their Return on Invested Capital year over year, 3) their Free Cash Flow year over year, 4) their Price to Earnings ratio.
6. Keep a Check on Your InvestmentsNow that you've invested in a few stocks you need to monitor them and assess their performance from time to time. It’s important not to obsess, i.e. checking several times a day, but checking in every few days or once a week is a good idea. Avoid the urge to buy and sell on a weekly basis, transaction costs will eat away a lot of your profits and any reaction you make will take place after any market adjustment has already occurred. You should only buy or sell stocks based on changes in the fundamentals of your investment or if you believe it is highly overpriced and can’t possibly go up further.
7. Keep Investing on a Regular BasisPutting away whatever you can afford on a monthly basis will greatly assist in growing the total value of your portfolio. Additionally, making those small monthly commitments will help you normalize your portfolio return for the ups and downs of the market. If you’re buying when the market is high and when it’s low your overall cost averages out.
By InvestorGuide Staff
Posted in ...Investing