So, are you ready to take the plunge and invest in the stock market for the first time? Stock investing for beginners can be daunting, so you’ll want an investment advisor who can walk you through the investment process and instruct you on what investments are right for you. In that vein, a prudent first step would be to go out and hire someone you trust.
Once you find an investment advisor that you trust consult with them to develop a good strategy of stock investments for beginners. I stress the beginners part because volatile stocks like penny stocks are typically too risky and stressful for first time investors.
Once you have a portfolio in place I want you to pick a fake portfolio. Why a fake stock portfolio? I want to teach you how to invest in the stock market on your own without risking real money. You have your real money invested with your broker anyway. Stock market investing for beginners can be very risky so you don’t want to jump in with both feet, do some planning. Now back to the fake portfolio.
Lay out the stock quote page or find a website that offers stock market quotes from the newspaper on the floor and pick out twenty stocks. Some people call this a chicken portfolio because after all a chicken could do the same picking. After that list is compiled, you go and spend hours on researching them to figure out which are winners and which should be avoided. I know many of you are looking for a quick get rich quick tip but stock investment for beginners is a lot of work.
Read annual reports, listen in on quarterly earnings conference calls, follow highly-paid analyst predictions, study industry trends, and then pick twenty stocks. Track your portfolio and the fake portfolio for a year, and as incredible as it may sound, the fake portfolio is probably going to win out, but the reason it will is because you put time and effort in to researching these stocks and when it comes to investing in the stock market for beginners, learning how to do your own research is invaluable.
Even randomly picking stocks without research can be a winning strategy. Yep, that’s what I said… random. How is this possible!? It’s because one of the fundamental benchmarks of modern finance is called the “Random Walk Theory.” Simply put, it means too many variables preclude the accurate prediction of how a stock price will perform. This is borne out by the fact there is a vast army of investment advisors and researchers, but relatively few of them are able to beat the broad performance of the stock market as a whole — particularly over a longer time horizon.
Put another way, all boats rise (or fall) with the tide. To beat the performance of the market as a whole, you have to exceed, or run counter to the movement of the tide, ALL the time. That is very, very difficult to achieve.
Overlaid on top of that, the investment lexicon can be bewildering to a first time investor, with terms like “growth stocks,” “value stocks,” “convertible debentures,” “no-load mutual funds,” or “hedge funds.”
So what is a beginning investor to do? Certainly you can do your own research and try to beat the chicken. You can hire a reputable stock broker, take his or her advice and hope they can beat the chicken. Or you can bet on the tide by investing in Exchange Traded Funds, or ETFs. These are investment instruments that will invest in, say, the entire New York Stock Exchange portfolio, or the S&P 500. By investing in these ETFs you will enjoy diversification, ride the performance of a chunk of the market as a whole, but you will still face fees, although typically lower than a standard mutual fund. A cautionary note on ETFs is that they have become so popular that a mind-numbing array of investment options exist, so make sure you know exactly what you’re getting with your investment — e.g. leveraged or unleveraged. If you are uncomfortable with ETF’s you should look at some of the best mutual funds that really leverage the market. There is always risk, to be sure, because the market as a whole — as recent events have shown — has plenty of downside risk. So if you are risk averse, better to put your money in U.S. Treasuries.
And did we mention taxes? Your stock investment strategy should always keep an eye on your personal tax situation and seek out the advice of a tax professional.
So, feel a little anxiety about how you should proceed with your beginning stock investment? Good. Complacency is the hand maiden of disaster in the stock market. Never invest more in equities than you can absorb, but to have the potential for equity growth you have to take risk. Stock market investing for beginners isn’t easy but with a little research you can really limit your downside.