Saving & Investing

Stock Market Investing for Newbies

During the past few years, the stock market has been turbulent, to say the least.

Over the long term, however, stocks historically have outperformed other investments - producing annual gains of about 10 percent when the peaks and valleys are balanced out. But, if you invest unwisely or if you are unlucky, you could lose all of your money.

Clearly, stock market investing is not for the faint of heart or for those who do not perform proper research. Experienced investors call it "due diligence." Here are some tips to get you started:

Begin small - and smart. Learn about the stock market - buying, selling, commissions, etc. Master the basics of public (stock-based) companies - earnings, quarterly reports, dividends, the differences between stocks and bonds, etc.
Consider opening a modest "starter" account with an online broker, which is likely to charge a lower commission than a conventional brokerage. Be aware, however, that online operations tend to offer less personal service than conventional brokerages.
Also consider starting off with mutual funds. These operations pool investors' money and buy a wide range of stocks and bonds. That tends to diminish your risk, though it also can moderate your return. Look for "no-load" funds with low annual fees.
Weigh your personal tolerance of risk and be aware of the risk-reward ratio. That is, if you are right about a risky investment - say, in a new firm or one in a particularly challenging business environment - you can achieve a relatively high return. But if you are wrong about the business' prospects, you stand a higher chance of losing some or all of your investment.
Diversify. Diversify. Diversify. Never put all of your eggs in one basket. Distribute them among savings accounts, certificates of deposit, various stocks, various bonds (including U.S. Treasury Bonds, which are extremely safe), mutual funds and so on.
Think long-term and stay practiced in the art of observing the market and observing your individual investments. If the basis on which you invested in a company changes for the better, consider investing more. If it changes for the worse, consider reducing your position or selling out. Also, don't get greedy - if your investment produces gains, consider selling some or all of your holding. In other words, don't fall in love with a stock. Take profits when you can.
Review your investments at least twice a year and examine the mix of your investments. Alter your plan as needed.

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