- Don’t buy penny stocks.
- Do not put all your money in one stock.
- Buy stocks in companies you believe in and understand what they do.
- Don’t panic and sell when the market goes down. The worse the market looks the better the opportunities to get bargains (usually).
- If you don’t feel comfortable buying individual stocks go with ETF’s with low expenses that track something like the S & P 500 but do diversify with time.
- Find a mentor that has market experience.
- Research a companies income statement, balance sheet, and cash flow.
- Last but far from least. Don’t try to get rich quick. Getting very wealthy slowly is a great way to go.
For new investors I would say to not put too much money into one stock. You need to diversify your portfolio via different sectors. Sectors are different areas of the market like technology, energy, financials etc. Never buy competing companies, (Microsoft and Apple for example), because when one does well usually the other does poorly.
Buying a stock is easy. Just set up a brokerage account (I use Merril Edge and I believe there is a $500 minimum), and select the stock you want to buy.
Finding decent stocks to buy is easy as well. Most large brokerages have automated investing tools that will assess your risk and re-balance your portfolio.
In addition, lots of business magazine publish special issues and articles each year on which companies they think will do well. Or you can do what most professionals advise, which is just buy an index fund of the major markets. I also like to watch Jim Cramer, on CNBC, for market advice.
Those approaches won’t make you rich overnight, but you’ll likely make a bit of money and more importantly you aren’t likely to lose it all and go broke. Beyond that, things get a little more challenging.
Great investing requires two things: The willingness and ability to do the homework required to evaluate a stock (dig into the financial reports, understand the economics at work, and determine the fair value of the stock), as well the right mentality (being unemotional, disciplined, and patient). In a nutshell, an investors job is to find stocks that are undervalued, and sell them when they are overvalued. That’s it.
Most retail investors don’t want to do any of the work and they treat the stock market like gambling. They place their bets based on little more than a hunch, and often lose money. (Some studies estimate that +90% of retail investors lose money)
Profitable investing isn’t rocket science, but it does require actual work. There is a ton of terminology, a bit of math, and lots of reading. If you’re willing to invest the time most people spend on a hobby (2–4 hours a week), you can do well. If you’re not that interested in learning how to invest and don’t want to spend the time, you’re better off with an index fund.