How to Start Investing in Stocks

By Timothy Sexton

  • Overview

    Investing in stocks has never been easier. So much information--which used to belong solely to the domain of the stock broker--is available today that many amateur investors actually are equipped with more tools for analysis than ever before. The biggest step you have to take is deciding whether to buy stocks directly or go through a stock broker.
  • How To Begin Investing in Stocks

    • Step 1

      There are essentially two main ways to begin buying and trading stocks. You can either sign up with a traditional stockbroker or with an online trading service such as E-Trade or Ameritrade. The main difference between investing with a stockbroker or with an online service is that you cut down on commissions and fees when you trade online, but usually at the expense of highly paid analysts whose job is to study all the myriad data that goes into deciding which stocks are most likely to rise or fall in value.

    • Step 2

      Once you have decided whether you want to invest through a broker or online, the next step is to decide on portfolio allocation. That means what kind of stocks you are going to invest in and how much of your portfolio will be distributed among them. The main types of stocks are income, growth small cap, and international. Generally speaking, the longer your investment outlook strategy, the more your portfolio will be weighted toward growth stocks, because these are the most volatile, yet proven, over the long term. The shorter your investment period, the higher the ratio of income stocks you need to provide a steady rate of return.
    • Step 3

      You must do the research, whether you use a stockbroker or do the buying and selling yourself online. Even if you have a stock broker, you should never allow all decisions to be made without your input. Information on companies that can be of value when you make your stock decisions is plentiful. Consult newspapers, television (especially CNBC), magazines, and websites.
    • Step 4

      Diversification is the process of investing across a breadth of stocks, rather than focusing on just one small segment. For instance, the new investor might be tempted to put all his money into electric cars or hybrid vehicles because so much emphasis has been placed upon the need to create alternative vehicles. If some circumstance were to end the progress of that industry, it would adversely affect the entire portfolio. Instead, successful investors diversify across multiple industries; it is the investment equivalent of not putting all your eggs into one basket.
    • Step 5

      Market timing is a magic holy grail of predicting when the market is going to hit a high and when it has reached a low, therefore offering the potential for making the most of the investment dollars. Market timing is the opposite of the buy-and-hold approach that eschews the process of prediction. Many seasoned investors have lost big money trying to time market highs and lows, so new investors should probably avoid trying this approach. Long-term investors especially should trust in the market to fluctuate to their advantage over the course of several decades.
    • Skill: Moderately Easy
    • Ingredients:
    • Internet access
    • Newspaper
    • Television
    • Patience

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