How to Invest in Stock

Investing in stock can be painful if you do not do your research. However, if you research and are smart about investing your can make serious money in stocks. Here is how to invest in stock

Instructions

1. First educate yourself about what stock is. When you buy stock realize that you are buying a portion of the company. This means that you need to know everything there is to know about that company so you have an idea of how the business may grow and profit in the future.

2. Next educate yourself about the types of stocks that are out there. There are large-cap and small cap stocks. There are energy and technology stocks. There are growth and value stocks. Go online to Google and learn about all of these so you can see the pros and cons of investing in each type and have a good idea of what type you want to invest in. Stick to this type so you can make sure that you know everything there is to know about the stock.

3. Now that you have ideas of what stocks you like track the earnings. Over the short term rumors can affect the stock prices, but over the long term the company earning affect the prices. Make sure that the company you are considering buying stock has a strong earning history.

4. Now analyze your risk tolerance. How much could you afford to loose? This is the amount you put towards investing in stock. This is because although education can help you avoid stock losses, losses can still happen.

5. Now analyze how you would feel if you lost everything. If it would kill you consider limiting your investments to large cap companies. They tend to post steady long term returns, but do not expect them to make you a millionaire. They will most likely just keep you in line with inflation. If you have more risk tolerance you may try small cap companies which typically can rise at a much faster pace, but are also more volatile.

6. Now you are almost ready to buy stock. However, before you make the jump look at the price/earnings (P/E) ratio. It is basically the price of a share divided by the earnings. The trick to this is what to use for the earnings. Everyone tends to use a different number. As a general rule using the average earning of the past year is typically a good idea. However, for more volatile stocks you may consider looking at the future predicted earnings. A P/E over 20 is typically a safe bet. You also use the P/E to get the PEG ratio. This is the P/E divided by the long term growth rate. Unless you have a high tolerance for risk you likely want a stock with a PEG close to 1.0 (or lower).

7. Now use these tools to pick 15 to 20 stocks for your portfolio. Track these and buy them one or two at a time. Follow their cycles so you can sell when they are on an up cycle and you can buy when they are on a low cycle.

Tips & Warnings

• If you have questions, always call an appropriate financial adviser.