Key Points on How to Invest in Stocks

Your first steps into serious stock investing can be confusing and alarming. There are thousands of stocks from which to choose, divided into groupings that seem vaguely defined, such as growth stocks, income stocks, penny stocks and blue chips. You can follow the advice of TV pundits and online advisory sites, but that still leaves you deciding which of dozens of stock issues to buy. To make matters more complicated, most of your friends and family members will give you their advice. There is a solution. It involves personal investment needs, methodical research and patience in moving your money into the market.

Investment Risk

The U.S. Securities and Exchange Commission recommends that you evaluate your own tolerance for financial risk before you invest. The market can fluctuate widely, and individual stocks can plummet in price when earnings don't quite match the projections of Wall Street stock analysts. Never invest money you can't afford to lose, and consider how you would feel if your investments were suddenly worth half of what you paid. Stocks are rated by rating agencies, such as Standard & Poor's, to give you a feeling of the strength of the underlying company and the likelihood that its stock price will appreciate.

Asset Diversification

Another thing the SEC suggests is to diversify your investments. This means to invest in different kinds of stocks, such as a mix of consumer products companies, utilities, technology, and biotech, and to vary the risk levels within your own tolerance. The higher the risk, it is said, the higher the reward -- and the greater the chance for loss. However, investing in a young and risky company might result in your owning shares in the next Apple. If you have a small amount of money to invest, don't try to spread it out over too many types of companies. But don't put all of it in one company, because that is putting all your eggs in one basket.

Research

There are many ways to research your potential investments. Major online brokerage firms provide information on stock analyst recommendations, and you can access the annual and quarterly reports of companies on the SEC's EDGAR database of company compliance documents. If reading stock information confuses you further, consider taking a class to learn basic techniques of financial analysis. Major online brokerage firms often offer these classes, as do online colleges and local night schools. Your research should give you an idea of which stocks seem to be the best investments out of your list of potentials.

Patience

You don't have to invest all your money at one time. A good way to move money into the market is to make regularly scheduled smaller investments in each of your selected stocks -- an approach called dollar-cost averaging. You buy portions of your position over time at different market prices. Because the market constantly fluctuates, this tactic helps you avoid buying your entire position just before the stock declines in price. Patient investing also means that you follow trading in your stock over time, waiting to buy the stock at a price that makes sense to you, the same way you wait to buy certain consumer items until they are on sale.

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