How to Safely Invest Money in Stocks

Wall Street is still the center of the financial world, but it's a worldwide business.

Advice on investing in the stock market abounds on the Internet and on television financial networks. Some advice will help you. Some will lead you in the wrong direction. How can you tell the difference? A few simple time-tested principles will help you to invest safely.

Things You'll Need

• Capital for investment
• A brokerage account in a large discount brokerage
• Investment books and newspapers

Instructions

1. Read before you invest. No one can build a successful stock market portfolio with stock tips from friends or investment gurus on CNBC, Bloomberg or Fox Business. As many experienced and disillusioned investors will tell you, following the advice of a full-service broker won't necessarily increase your income either, although it will probably improve your broker's. You need to develop your own expertise, which takes time.

2. Begin by reading "The Intelligent Investor," Walter Graham's classic book on value investing. Value investing consists of evaluating stocks according to defined financial criteria that reveal the underlying value of the stock--such things as the price-to-earnings ratio. The revised edition has contributions from Warren Buffet, the billionaire Oklahoma investor who used Graham's precepts in his own career. See the Reference and Resource sections for several other good investment books for beginning investors.

3. Subscribe to The Wall Street Journal and read it daily. After a few months, you will begin to understand how the stock market works. Keep reading investment books as well. The successful investor never stops learning. Avoid the many investment books that promise to make you rich in a hurry, or propose to teach you a guaranteed investment system; that system doesn't exist.

4. Begin slowly. Almost all investors make a lot of mistakes early in their investment careers. If you have, say, $25,000 to invest, invest it over several months one equity at a time, not all at once. Your investment style should also reflect your age; a young investor can suitably handle a little more risk than an investor approaching retirement.

5. Diversify. Never put all your eggs in one basket. A successful $25,000 investment portfolio should have at least a half-dozen equities. A $100,000 portfolio should have twice that. A six-equity small portfolio should have one small-cap domestic equity. (A domestic equity, as opposed to a foreign equity, consists of one or more U. S. businesses.) You should also have at least one mid-cap domestic and one or two domestic big-caps. You can also buy one or two foreign equities. For an understanding of these terms, see the Reference section.

6. Begin by investing in mutual funds and exchange traded funds rather than individual stocks. A mutual fund consists of a selection of many individual stocks; when you buy a mutual fund share, you get a small share of many different stocks. This helps you diversify. The somewhat similar exchange traded fund has certain advantages and disadvantages relative to a mutual fund, but both diversify risk, probably the single most important factor for safe investing. To understand the differences between these two fund types, see the Reference section.

7. Open an account with a large discount broker like Schwab, Scott-trade, E-trade or TD Ameritrade. For a list of more top-rated large discount brokers, see the Reference section. So-called "full service" brokers offer the small investor few advantages and charge up to ten times as much per trade as discount brokers.

Tips & Warnings

• The largest discount brokers offer a limited number of mutual funds and ETFs without a trading fee, and thousands more for a low fee. More importantly, they offer extensive research and evaluation services. Use them, particularly their mutual funds and ETF ratings, organized by type (domestic, foreign, big cap, emerging market and many more sectors and specializations).

• Never give anyone full authority over your stock account. In very specific and limited instances, it can make sense to allow an established stock manager "to trade in your account," with a limited power of attorney that does not give him the ability to remove money. To understand what happens when you get careless about this rule, do an online search for "Bernard Madoff." He cost a lot of smart and successful people their life savings, over 50 billion dollars worth.

References

• "The Intelligent Investor: The Definitive Book on Value Investing, Revised Edition"; Graham, Sweig and Buffet; 2003
• "Value Investing Made Easy: Benjamin Graham's Classic Investment Strategy..."; Janet Lowe; 1996
• Investopedia: What Is A Small Cap?;
• Forbes: Mutual Fund Or ETF: Which Is Right For You?
• Consumersearch: Online Brokers: Reviews

Resources

• "Common Stocks and Uncommon Profits..."; Philip Fisher; 2003
• "The Guru Investor: How to Beat the Market Using History's Best...Strategies"; Jack Forehand' 2009
• "What Works on Wall Street:...Best-Performing Investment Strategies..."; James O-Shaughnessy; 1998
• "Investing with Exchange-Traded Funds..."; Martin Appel; 2008
• "David Scott's Guide to Investing in Mutual Funds"; David Scott; 2004