Stock Investing Basics

The first thing you need to know about stock market investing is that it is easy to do and that anyone can do it.  The second thing to know is that there is no 'perfect' way to invest in the stock market. And there is no 'perfect' stock or investment product for you to choose. 

The best investment choices are the one's that you are comfortable with and the one's that most closely meet your goals. With that said, you can always choose stocks better when you're educated, so once you get started, keep practicing and you should keep getting better over time. As your investments grow, so will your knowledge of how to invest. Start simple and as you learn and save more money, expand and diversify the types of investments you have.

In its simplest form, here are the steps required to invest in the stock market:

Save Money

This sounds pretty simple but is actually the single biggest deterrent to investing.  It is important to know that you don't have to save a lot of money to begin investing.  There are plans were you can start by investing as little as $50 per paycheck. However, most brokerages require a $500 or $1,000 initial deposit to open an account.  If you can't come up with that much money right away, don't worry, start your own savings plan and tuck away as much money as you can in a bank savings account until you can fund your brokerage account.  At $50-$100 per paycheck, you'll be up and running in just a few months.  Having trouble saving money? You may want to visit this site and read hundreds of ways to save money.

Create a Strategy

Now it's time to create your investing strategy.  Are you going to invest for growth, for speculation, for a down payment on a house, for retirement, or for college?  Also, are you going to invest a set amount of money each month or are you going to try to 'time' the market? For a more detailed explanation of strategies, see our section on stock investment strategies.

Open a Stock Account

Now that you've saved money and have an idea of your strategy, it's time to open your stock account.  If you are opening an account for speculation, you'll want to open a margin account with option trading enabled, if you are looking for a retirement account, you'll want to explore the tax benefits of opening an IRA or Roth IRA, and if you are saving for college, you'll want to explore the 529 and Coverdell IRA accounts. For a more detailed analysis on opening account, see our section on how and where to open a stock account.

Fund Your Stock Account

This part is really easy. Once your account is opened you need to send money to your account.  A direct link between your checking / savings account and your brokerage is the fastest and most convenient way to fund your account.  By doing this, you can automatically have funds transferred each paycheck or month, or you can manually move money whenever it is available.

Select and Purchase Stocks or Mutual Funds

This is probably the hardest part of investing because there are tens of thousands of different investments to choose from.  Do you choose stocks, bonds or mutual funds?  And then, which specific stocks or funds do you buy?  The best way to choose stocks is to learn how to do your own research, which you can find in our section on stock investment research.  We also have a section on analyzing mutual funds.

Save More Money

Until you retire, you should never stop saving money.  Continue to save money with the goal of saving more and more each year.  As you watch your prior investments grow, you should become more and more motivated to save even more money.  The fastest way to do this is to increase your income and lower your expenses at the same time.

Invest in More Stocks and Funds

With the new money, invest in different stocks and funds to build a diversified portfolio.  See our section on building your stock portfolio.

Keep Educating Yourself

Keep reading up on the stock market and finding new investments that are right for you.  The more you read, learn and watch, the easier it will be for you to choose investments. See our section on recommended reading for stock investing.

Occasionally Rebalance Your Portfolio

Every year or so, take a look at your total portfolio and make sure that it is diversified, invested in quality investments, and that it is aimed toward your goals.  See our section on building your stock portfolio.

Another good way to learn the stock investing basics is by asking questions.

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Mutual Fund Basics

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Mutual Funds are a part of almost everyone's investment portfolio.  They are offered through banks, stock accounts, employee retirement accounts and can even be bought directly from the mutual fund company.  But do you really know what a mutual fund is and why it makes a good investment?  Here are some of the basics of mutual funds.

Definiton of Mutual Funds.  A mutual fund is a fund that buys and holds shares of multiple securities.  The holdings can consist of any type of security, but are usually stocks or bonds.  The fund buys a large number of shares in different securities and then sells shares of its fund to individual shareholders.  Mutual funds are not listed on an exchange, buth their share prices are calculated and reported at the end of each trading day.  Mutual funds can be bought and sold through most broker accounts, some banks, through retirement plans, and directly from the mutual fund company.  The funds are regulated by the Securities and Exchange Commission (SEC) and there are strict rules as to how their prices, returns and tax implications are measured and reported.

Benefits of Mutual Funds.  The benefits of mutual funds are easy to define.  They offer small and individual investors a way to buy a large number of diversified stocks and bonds with a small amount of money.  For example, if you have $1,000 to invest you could buy a 10 shares of 5 different $20 stocks.  Your trading fee would be for 5 transactions (maybe around $50, or 5%).  Furthermore, you would not own a well diversified portfolio and would be subject to extra risk.  However, you could buy $1,000 worth of a well diversified mutual fund for a small or no transaction fee and then indirectly own 100s or even 1000s of different company stocks, thereby offering you the protection of diversification.  Another benefit is that you do not have to be a stock picker or rely on market timing to buy mutual funds.  You can know nothing about individual stocks and still easily select a mutual fund.  Also, because mutual funds pool people's money, they have a lot of assets and are therefore able to buy IPOs and other offerings directly that individual investors are excluded from.

Important Aspects of Mutual Funds.  A few basic mutual fund attributes that you should be aware of are the goals, asset types, fee structures, load, turnover, top holdings, and tax implications of mutual funds.  All of these attributes are reported by the fund company and can be found on the detail page of the mutual fund on yahoo finance, google finance, or your brokerage account (etrade, ameritrade, etc.).  You can also get copies of the fund's prospectus, which give more detailed information.  You can get this information online or on paper. Goals. Each mutual fund has a specific goal.  It could be to attain high growth, high income, stability or to minimize taxes.  It could be to invest in emerging companies, green technologies, or a specific region or industry.Asset Types.  Each mutual fund spells out what type off assets it buys.  They can vary widely and include small, medium or large cap stocks, treasury, corporate or junk bonds, derivatives or real estate assets, foreign, domestic or emerging market assets, or any other asset type.  This will be disclosed by the fund.Fee Structure.  Most funds charge a flat expense fee that will be clearly displayed.  Some funds charge a fraction of a percent and some charge as much as 5%.  Also, some funds have varying fees based on their performance.  The best fund companies do not charge the higher fees, so be very vigilant.  T Rowe Price and Vanguard offer thousands of low cost funds and have some of the best performing funds.  Every percent you pay in fees is subtracted from your returns, so a few percent a year can really cost you a lot in the long run.  Buy the low fee funds.No Load or Load Mutual Funds.  Some funds charge loads, or fees to buy the fund.  Be wary of any fund charging a load.  Your broker or some third party is getting paid the load to sell you the fund.  In our opinion there is no reason to buy a load fund.  Look for a similar no load fund.Turnover.  Turnover is the percentage of the mutual fund portfolio that is sold each year.  Low turnover means the fund does not trade very often.  This usually means that they don't have to pay as much in capital gains taxes and trading costs.  These savings get passed on to you if you buy a fund with low turnover.  Some funds have turnover over 100%, this means that they are more like traders than investors which is a red flag when looking at mutual fund attributes.Top Holdings.  Each fund must disclose its top holdings.  Look at the list and make sure that the companies represented in this list are in line with the type of investments you want to invest in.  When buying multiple funds, look at the lists and make sure there isn't too much overlap.  For example, if you are buying several high growth funds, there is a good chance that the same stock is in all of them (like Apple or Cisco).  Check the top holdings to get an idea of the kind of stocks the fund holds.Tax Implications.  Turnover factors into the cost of ownership by increasing the annual tax burden on a mutual fund.  Dividend funds also have higher payouts and hence higher taxes.  Municipal or federal bond funds can sometimes be state and local tax free.  Know how your fund handles taxes so you can be prepared.

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