Many people are interested in investing in stocks but don't know where to start. With thousands of companies to choose from, lots of economic uncertainty, and the recent bankruptcy of some of the country's top companies, many people are understandably wary of the financial markets. Yet most people aren't content to leave their money in savings accounts that earn low rates of interest. Here are some good ways to get started investing in stocks.
Use What You Already Know
If you have already have knowledge of a particular industry or subject, use it to select companies in which to invest. Many people make the mistake of investing in things that they know little about. Firsthand knowledge of an industry, product or service trumps most other kinds of research. Believe it or not, talking with your kids is a good idea, too. They're usually more aware of the latest trends in music, clothes, games and electronics than are adults.
Look Into Mutual Funds and Index Tracking Stocks
If you're not an experienced stock picker, mutual funds are a good idea. Thousands of funds are available. You can find ones that specialize in sectors that you think are going to do well. Several newsletters can give you professional guidance on which funds are expected to excel.
Index funds have very low costs, and give you ownership in a broad diversified portfolio right away. Index tracking stocks are also a good idea. Like mutual funds, they represent ownership in a "basket" of stocks, but you're allowed to buy and sell them any time the markets are open. Trading in mutual funds is limited to after the markets are closed.
Use "Dollar Cost Averaging"
It's never a good idea to invest a lot of money in stocks all at once. Rather, use the technique know as "dollar cost averaging," which is recommended by many experts. Using this method, you invest a fixed-dollar amount at regular intervals, typically once a month. This way, you'll automatically be buying more shares when prices are low and fewer when prices are high. Normally, this will result in a lower average cost per share.
Dividend Reinvestment Plans
Look for companies that offer dividend reinvestment plans. These plans allow you to automatically reinvest any dividends you receive and also to make optional additional contributions several times per year in order to buy more shares. This method will save you money, as you won't pay any brokerage commissions on the shares you purchase through these plans.