This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Saturday, September 1, 2007

So you want to buy stocks?

Posted by Paul
That was me about 10 years ago. I was recently out of college and had just managed to save enough money that I could actually look around for interesting ways to invest it.

This was when The Beardstown Ladies were at the height of their fame, and it seemed like everyone was getting into the stock market.

As I started contemplating buying stocks, I decided to start by joining an investment club. These are simply groups of people who pool their money, time and knowledge to buy stocks together and share in the profits or losses. I joined a club at my work where people would individually present stocks to the group and we would vote on whether or not to purchase them. If you are new to investing in individual securities I would highly recommend joining (or starting) an investment club for the following reasons:

1) Smaller investment in cash. Many investment clubs require a small monthly fee that goes into the club's account and is used for buying stocks. This fee can be very small (like $10 a month), so you get to learn about the stock market with a very small outlay of cash.

2) Shared pool of knowledge. It's often more fun to learn about something with a group, and an investment club is a great way to do this.

3) Avoids speculative investing. If you are a member of a club that meets once a month, then it forces you to get out of the "time the market" mentality and forces you to think more long term with your investments which is generally thought of as the best way to view the market.

So maybe you can't find an investment club, or perhaps you just want to skip that step and dive in for yourself. Here are a few tips I can give you as far as how to invest in individual stocks:

Tip 1: Find yourself a cheap broker. There are many simple cheap online brokers (eTrade, Ameritrade, etc. ) where opening a brokerage account is incredibly simple. If you are getting into the stock market for the first time I would suggest going with something like this. I've used eTrade before and they were fine.

Tip 2: Avoid speculative trading. When you first buy stocks there is often this desire to want to check your stock every few hours and buy and sell constantly. This sort of timing the market mentality is generally not a good way to start off.

Tip 3: Never invest more than you are prepared to lose. In my opinion, buying and selling individual securities should only be done as either a fun little side hobby or a serious job where you spend a lot of time and energy researching and managing your stocks. Most of us already have serious jobs so I only suggest purchasing individual securities as a hobby.

Tip 4: Consider not doing it. I'm showing my bias here, but this was the conclusion I came to once I had played in the stock market for a while. The problem I ran into was that investing in individual company stocks doesn't allow for diversification. There are many success stories about people investing in securities, but there are even more failure stories. Before you start putting any significant money into individual stocks, I would highly recommend that you take a look at mutual funds or a simple index fund.

As I mentioned I started off by joining an investment club. I learned a lot, made a little money, and had some fun. Then I opened my open brokerage account and bought a few stocks. My few stocks did okay, but not great, and after a while I decided that individual securities were not for me so I decided to sell it all (and by sell it all I'm only talking about $1200 at the height of my portfolio).

Now I only invest in mutual funds (through my 401k and Roth) with the exception of Berkshire-Hathaway.

I've decided that individual securities is just too risky for me.

One last point, I know that there are various places on the internet where you can play "fantasy stock market" where you buy and sell securities with fictional money. If you have the patience, I would recommend doing something like this for a few months. It's another great way to learn about the highs and lows of the stock market without any outlay of cash.

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