How to Begin Investing in Stocks
How to begin investing in stocks can be overwhelming if you do not know where to start. This article will go through the basics of stock investing and the fundamentals of what to look at before purchasing stocks.
- Difficulty:
- Moderate
Instructions
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The first thing to do before you start investing in stocks is to know what you are hoping to get from your investment. Are you looking for a long term investment that will have steady growth and low risk. Or are you looking for high growth potential and are not as worried about the risk. This decision will determine where your investing will take you so make sure you have a good understanding of what you are after before you go any further.
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The end result of you investing should be a balanced portfolio so try and look for stocks across different sectors that are of interest. There are 12 different sectors on the U.S. Stock market and within each sector are different industries. If you invested too heavily in one sector and that one was to decline rapidly than you would have nothing to offset the losses. A good balanced portfolio of $10,000 would have $1,000 in at least 5 different sectors 10 would be even better.
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Now that you have decided on how you are going to be investing. You need to start making a list of stocks to research. Some good website for gathering data are Google Finance, Yahoo Finance, MSN Finance, and Motley Fool Website. CNBC on television also has some good shows for learning about stocks.
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Reading articles online is a great way to identify stocks of interest. There are articles on high dividend producing stocks, undervalued stocks, and small companies that look like they will break out soon. It can be a daunting task just identifying stock so I would stick with what you know and work from there. For instance, if you are in the technology industry and know a lot about computers look at the stocks from the computer companies that you know and like. Remember you are just starting, so keep it simple to begin with.
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So now you have gathered a list of stocks to research what do you do now? There are some key things you can look at to evaluate the stocks that you have listed. Knowledge is power so the more you know the better.
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Example or Research Chart
First, write down all the stocks that you have in a column and leave plenty of room next to it for the data you are going to look at. The things you are going to look at are Earning, P/E Ratios, Stock Ratings, Debt, Dividends, and the stock charts.
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Earning are one of the single most important parts of any company, basically the stock price follows the earnings. When looking at earnings look at each quarter compared to the previous years same quarter to see if there is an increase or decrease. For example, look at Q1 of 2009 and 2008 and so on for each quarter. This will give you a better understanding of the companies growth rather than looking quarter to quarter within a calendar year. This is because stock may have seasonal sales where Q1 may always be high and in Q2 there is a large drop in earnings. If you were to just look at this then you could mistakenly think that earnings are decreasing when comparing with the previous years quarter there was a 20 % growth rate. You want to look for companies with steady growth quarter to quarter or stable earnings if you are looking for lower risk stocks.
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The PE Ratio is the Price to Earnings Ratio of a company. It tells you whether a stock is over or undervalued based on the companies earnings. It is good to compare a stocks PE ratio to the industry's PE ratio to determine if investors are willing to pay more or less for that companies stock versus the industry. A company with a higher PE than the industry average typically means you are paying an inflated cost because of other investors opinion of the stock. I typically look for stocks with a low PE because I think of them as being on sale.
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Stock Ratings are a way to see what analysts or other investors think of the stock. However, always remember that ratings fluctuate up and down frequently. There are many stock rating systems to look at, MSN has a good stock rater called Stockscouter which rates stock based on the expected performance against the S&P and their risk levels. There is also an analyst rating which tells whether the stock is a sell, hold or buy. Another good site to check out for ratings is the Motley Fool Caps. This site allows other investors to rate stock as well as show you how outside analyst rank the stock.
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Debt is another area that should be looked at compared to the industry standard. This is especially true in a market such as the last two quarters of 2008 and first two of 2009. Many sectors traditionally carrying a significant amount of debt to keep their business going but you should look for companies that have a debt ratio at or below the industry average. Companies that carrying excessively higher debt than the industry would be more risky.
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Dividends are great in a slow or down market. A dividend is a payment that the company makes on a quarterly basis from its profits. So, regardless of whether the stock price goes up or down you will get a percentage of your total stock price back. Dividends are either cash or sometimes they can be in the form of additional stock shares. Often companies that carry dividends are larger stable companies such as 3M or Johnson & Johnson but there are other dividend stocks out there with high yields called REITS. These stocks have to pay out all of their profits to their stock holders so in some cases you can get dividend of 10% or more. If you are interested in Dividend Investing check out the article in the links below for more information.
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Finally, looking at the stock chart is important. Whether you are looking for high growth or a more stable stock will determine what you are looking for when you look at a stock' s chart. For high growth potential you want to look for stocks that are trending upward over the last year or more with no sign of leveling off. For lower risk stocks the charts may look a little more flat but should still show a positive stock price increase rather than decline. You should look at the stock price over the last year, and out. It will show you cyclical patterns in the stock price so you do not buy at the top of a cyclical pattern or stocks that spiked early on then leveled off. You can usually compare the stock chart to others in the industry or to the S&P, which is an index of 500 large cap common stocks on the market. Beating industry averages or the S&P would mean there is potential to make more money with that stock.
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This article covers the basics of stock investing. The most important thing to remember is to gather as much information as you can, then finally make that leap and buy your first stock. Know that you will make mistakes even the best investors make mistakes and buy stocks that flop. Start small and give yourself time to learn and have fun hopefully you will find that one stock that will change the world. Imagine if you had bought Google in 2004 at $100 even if you had only bought 10 shares by 2008 you would have made 70% return on your stock if you sold at the peak. Good Luck investing.
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