Stock Investment 101
Stock investing is undoubtedly one of the most puzzling and confusing ways of earning money known to man. Not only is the business filled with all sorts of technical jargon, the very nature of stock investment is paradoxical. On one hand, investment can be a thrilling ride and a ticket to immense wealth and fame. However, stock investing also has a darker edge, improper understanding of the mechanics of stock investing can have catastrophic results.
While almost everyone who ventures into stock investing dreams of being the next Warren Buffet, you cannot afford to neglect getting a good foundation early on. This article will go through “Stock Investment 101”, the basic mechanics and strategies of stock investment and help beginners like you to break into the stock investment world with a good sense of what to do.
Let’s start at the very first step: choosing a broker. Your broker is the doorway between you and the stock market. The broker handles all of your queries, concerns and instructions. His job is to research various stock options for your consideration, give you advice on investment potentials and also tell you how your current portfolio is going.
There are two types of brokers: Full service brokers and discount brokers. Full service brokers offer the traditional one-to-one service while discount brokers are for more experienced investors who don’t need as much service. As the name suggests, discount brokers are cheaper to hire and should definitely be a consideration once you become more experienced. As a beginner however, you will want to go with a full service broker.
Always make sure you are comfortable with your broker, going with a major brokerage firm like Merrill Lynch or Morgan Stanley does not guarantee better results. As a rule of thumb, treat it like you’re giving your broker a loan, if you would feel uncomfortable loaning the money, then the broker is not right for you.
Next, you have to decide which sector to invest in. Now, the best investors will have a varied portfolio comprising of shares from different sectors, this is done so that if one sector experiences a major setback due to scandals or loss in consumer confidence, then at least the other stocks will remain largely unaffected. While I would advise that you keep this in mind, I would encourage you to start off in just one sector first. The reason is simple, as a beginner you do not know all of the nuances and tricks of the stock market yet.
Furthermore, you would not be able to interpret the information related to your stocks. For example, in the electronics sector, a CEO change might not have a great impact on the stock price while the same cannot be said about the banking sector.
For this reason, I would recommend that you start off in a sector that you know well, something that you have worked in before and have experience with the dealings of the industry. By doing this, you break into stock investment with a relatively safe approach, allowing you to pick up experience in trading without exposing you to too much risk.
The first few years are your “learning years”, don’t go all out and buy loads of shares hoping to earn a quick buck. Instead, take your time and soak in all of the information that you can before raising the stakes and trying to earn some real money.
When you decide on your sector, you then need to choose an investment strategy. There is no hard and fast rule for this, even for beginners. The type of strategy you choose will depend not only on the sector you invest in but also on your personal needs and goals. Basically, such strategies offer different investment periods and returns, it is up to you to decide which option to go for. This is something to discuss with your broker thoroughly before embarking on any sort of investment. Once again, keep in mind that as you get more experienced, you will want to vary your portfolio to include different investment strategies for the sake of versatility.
There you have it! These three steps are the essential basics in beginning your journey through the jungle of stock investment. Hopefully, these stock 101 tips will help you begin to understand how the stock market works and give you a good idea of what practices you should adopt. As with gambling, never ever overextend yourself – always invest within your limits and never invest more than you can afford to lose.
To learn more on investing in the stock market, check out my DVD, “Stock Market For Beginners“.
