If you haven’t already, now is an excellent time to begin investing in the stock market. Why? Because stock prices overall are at historic lows. But for those who have never invested before, where should you begin?
We always seem to get the same advice-do your research before investing in the stocks of public companies, and balance your portfolio based on your appetite for risk. But many beginner investors ask the same question-what should I be looking for in my research?
While not an all-inclusive list, this article outlines a few things that beginner investors should consider when thinking about investing in a company (my assumption is that even the beginner investor knows how to read and understand a company’s financial statements. If not, learn to do this-and quickly).
Don’t rely on others to make your investment decisions for you. Yes, it is a great idea to talk to savvy investors about the market and companies you may be interested in investing in. However, you should not purchase a stock just because that investor told you to do so. Instead, find out what you can on your own about the company (especially if you are very unfamiliar with the company) so you can try to figure out why it would be a good investment. You’ll want to consider the industry in which a company operates, the strength of management, competitor performance, and the strength of their financial statements when researching companies.
You also don’t want to rely solely on your stock broker for investing advice. Again, consider their suggestions, but do your own research.
Start by investing in companies whose products or services you already use. If you don’t know where to begin in considering company shares to purchase, why not start with a company who sells products or services in which you are already familiar? If you like that company’s products, it is likely that others do as well.
Don’t invest your life savings. As a matter of fact, keep your savings account completely separate from your investment account. Your savings account should strictly be for financial emergencies and typically cover three to six months’ worth of expenses. Your investment account should hold the funds that you can do without for a while. This way, if you happen to make an investment that goes down in value, you have time to wait for it to recover.
Invest with the understanding that the entire amount could be lost tomorrow. Not to scare you away from investing, but the reality is that favorable returns are not guaranteed on investments. The value of your stocks or bonds could go down rather quickly-and it is possible that they might never recover.
Pay attention to a company’s liquidity, debt, and leverage. This goes back to analyzing and understanding a company’s financial statements. Some companies are more leveraged than others due to the type of industry in which they operate. To find out what is and isn’t normal, compare the balance sheet of the company in which you are thinking about investing to the balance sheets of its top three competitors. If your company’s financials are way out of whack, try to investigate further to determine why.
An oldie but goodie-don’t try to time the market. It is nearly impossible to guess the exact timeframe to buy or sell stocks to gain the most profit. Instead, invest a certain amount of money each month into the stocks. This is called dollar-averaging investing. With this method, you will acquire stocks at a range of prices, which could diminish your losses in the future.
There are plenty of resources available in print and online to help the beginner investor. I would recommend Investing for Dummies by Eric Tyson or Bogle on Mutual Funds: New Perspectives for the Intelligent Investor by John C. Bogle as a start. Another great resource for the beginner investor is the American Association of Individual Investors (www.aaii.org). Here you’ll have the opportunity to discuss your strategies with other individual investors such as yourself.