Basics of Stock Investing

To new investors, buying and selling stocks may feel like the Wild, Wild West. Successful investors know that good stock investing isn’t as dramatic as cable stock market shows make it seem. Investment gurus such as Peter Lynch and Warren Buffett have earned hundreds of millions of dollars investing carefully and ignoring the daily bumps of the stock market. If you’ve ever wanted to invest in stocks but aren’t sure where to start, all you’ll need is a few basic tips to complete the first trade.

Begin With Goals

The U.S. Securities and Exchange Commission recommends that investors begin by making a list of goals they wish to achieve in the stock market. This helps avoid searching for the next elusive hot stock and instead focus on the end goal when buying stocks. List the time frame and amount of money needed to reach your goal. This will work as a filter to evaluate stock investments. Many stocks will be either too volatile or staid to fit your needs.

Ultimately, prudent investors need to know how much money each goal requires and what return it’ll take to achieve the goal. This will drive decision making around how much to invest in each stock and what return will be acceptable when monitoring the portfolio. Knowing the return you’ll need each investment to earn is paramount to picking the right stocks. It wouldn’t make sense look at a stock with a history of returning eight percent if the benchmark requires a 12 percent return.

Create a Watch List

Write down potential stock investing opportunities that may meet your goal. This won’t be a final list, but is going to be a place to start filtering. Ultimately, this list will include 40 to 50 companies to begin tracking.

Get to know these companies. Successful investor Peter Lynch preaches a doctrine of “buying what you know.” This means that companies you admire should be on the watch list. Look around your home. What products or services do you use often? These firms should make the cut for the watch list.

By focusing on familiar investments, you’re more likely to comprehend why stocks in the portfolio and watch list fluctuate. It’s easier to comprehend why a product isn’t selling as expected if you own it personally. Sometimes there are forces outside of a company’s control and you may decide to hold onto deflated shares. Other times, the product was inferior and the stock is taking an understandable hit.

Choose the Right Stocks

It takes time and energy to adequately monitor stocks and track news about invested firms. Diligent investors stand a chance of finding the next Google or Microsoft. If management decisions linger, the portfolio suffers because you didn’t react quickly enough to changing market conditions.

For some investors who are busy with other pursuits, mutual funds are a reasonable method of investing in stocks. Mutual funds diversify invested cash among many different stocks of a similar type. This helps you avoid the financial risk of a collapse to a single stock because the fund holds many stocks rather than only a handful.

Research Investments

Stock researchers use two different types of analysis: fundamental and technical. Fundamental analysis covers the management acumen and products of the company. If a company creates good products and makes a profit, stocks usually rise. Technical researchers track stock chart patterns. Stocks that rise tend to continue to rise. Stocks often will move based on trading patterns. Although some fundamental analysts believe tracking technical charts is a little like trying to read tea leaves, enough people believe and follow technical analysis that it often works.

To perform analysis, you’ll need to find out the basics of a company’s performance and track charts. Request from each company on your watch list detailed information, such as an annual report. Separate stocks based on earnings, revenues, recent chart performance, dividends, and market sector. If using mutual funds, ask each fund family for a prospectus and sort funds based on performance, manager tenure, expenses and investment category.

Know When To Fold

Sometimes investments don’t perform the way you’d envisioned, and selling is the only smart choice. A basic stock investing strategy that many otherwise successful investors forget is to have a sell discipline. Review the portfolio goals to know how much fluctuation your stocks can experience before underperforming stocks must be sold to preserve the cash value. If you own mutual funds, monitor each fund’s manager at least semi-annually to ensure they’re keeping up with other managers in the same category. Review each category and decide whether it still meets your investment goals.

Investors with individual stocks often use a tool called a stop loss to sell investments that are in retreat. Stop losses are orders to sell an investment if it reaches a predetermined trigger below the current trading price. Investors like stop loss orders because they allow you to step away from the computer screen without worry that a stock will plummet while you’re not watching.

In the end, most investors decide whether to buy based on a gut decision. However, by starting with a clear set of goals, choosing stocks based on those goals to watch, and finally weeding your watch list by using fundamental and technical research, you’re likely to pick stocks that meet your objective. By employing a solid sell strategy, you’ll hold onto gains and ensure that the portfolio keeps marching toward your end goal.