Investing in stocks does not need to be confusing or overwhelming. If you use some tried-and-true techniques, you can invest and monitor your investments without stress. Once you have learned a few trick and tips for investing in stocks, you can put your money to work for you.
Determine Your Risk Tolerance
Before you put even one penny in the stock market, you need to know what kind of investor you are. For example, if you are near retirement and want to protect your money, you might have a very low tolerance for risk. You could look at blue chip stocks, so-called because the companies that issue these stocks tend to be steady and reliable. The Dow Jones Industrials are considered blue chip stocks, as are stocks of companies that have been around for many decades. If you feel you have plenty of time to ride through extreme ups and downs, and are willing to take a chance on riskier stocks, you might have a high risk tolerance. High-tech companies and start-ups offer higher risk because many of these types of companies still don't have a proven track record of success. The ones that succeed, however, tend to offer better-than-average stock returns. You might also be somewhere in the middle. For medium-risk stocks, you could consider established companies that have been growing but have only been on the market for a period of 10 to 15 years. Remember this simple formula for investing in stocks: risk equals reward. That means the higher the potential rewards, the higher the potential risks.
Stocks come in categories or classes. For example, you can invest in medical stocks, manufacturing stocks, high-tech stocks and steel stocks, to give a few examples. Each type of industry has its ups and downs, and the companies in those industries seldom buck the trend. For example, if the manufacturing sector as a whole experiences a decline, manufacturing stocks most likely will, too. Begin your investing program by choosing a variety of industries to invest in, so that if one goes down, the rest of your portfolio has a chance to make up for it.
Don’t buy blindly. Many financial websites offer information on companies and their stocks. You can also find plenty of information on a company's webite. Look at the stock’s history, learn about the company’s financial performance and management team, and research what professional stock analysts have to say about the stock and its potential for higher value.
Once you make investment decisions, don’t nervously debate whether or not you should sell the stock. Certainly you might learn something that makes you think the stock is not as good an investment as you thought it would be, and you have every right to sell such a stock. However, don’t let your hopes rise and fall with every peak and valley in the stock’s chart. Expect ups and downs, but look for a generally upward trend to develop.
Learn Fundamentals vs. Technical Aspects
People who use stock charts are called “technical traders.” Technical traders make investment decisions based on how the stock charts look. For example, if a stock chart shows a bigger-than-average decline in price on higher-than-average volume, many technical traders would sell this stock because they figure it will go down further because so many sellers are getting rid of it quickly. People who study company profitability and sales are called “fundamental traders.” A fundamental trader examines the company that issues the stock, looking for low debt, steady profits, sales growth and expansion plans. Starting out, use both approaches until you decide what fits best with your personality. Many investors have had success with both approaches.
Get Free Stock Charts
Many online services, such as StockCharts.com, offer free stock charts. Some of the major search engines also provide free stock charts as well as tutorials that teach you how to read charts and make your own calcuations. You can get advanced options for your charts and begin learning how a successful stock looks when it is charted.
Treat it Like a Job
Your money is important. Set aside some time each day to study the markets, learn more about investing, and monitor how your stocks are doing.
Add to Your Portfolio
Keep adding to your portfolio on a regular basis, so that you have more money to invest. Your portfolio will grow along with your investment knowledge. One way to do this is to set aside savings each month and wait until you have at least $1,000 to invest. Next, buy a new stock or add to your holdings in a stock you already own. Most brokers charge trading fees on a per-trade basis, so buying at least $1,000 worth of stock can keep the percentage of your trading fees down. For example, if you buy $500 worth of stock and pay a $10 trading fee, then a few weeks later buy another $500 worth of the same stock and pay a $10 trading fee, you paid $20 to buy $1,000 worth of stock. That's 2 percent. Instead, make one trade for $1,000 and pay only $10, or 1 percent of your total trade.
You don’t have to be in on the beginning of an uptrend. Let everyone else take a chance, and then when you determine that a stock’s rise has staying power, you can buy. This can help you avoid fake rallies where a stock looks great and then tumbles quickly. A stock that rises in price 2 or 3 percent, levels out, then rises another 2 or 3 percent before resting again, may have staying power. A stock that shoots up suddenly over a period of two or there days, then drops dramatically, may be confusing investors and could lack the power to climb steadily.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.