Starting Out in Investing, Part 1.

Starting out in the world of investing can be a daunting task. There is a ton of dry terminology and formulas to wrap your head around. On top of that, there are literally dozens of websites that have their own experts, telling you what you should and shouldn’t do—not to mention all the talking heads on CNBC, Bloomberg, etc. Everyone has an opinion and they aren’t afraid to share it. This is not necessarily a bad thing, knowledge is power after all. The problem is that when you’re starting out, this can be information overload and literally overwhelm a person to the point where they quit before they start.

You are here because you have reached a point in your life where you can afford to invest some of your hard-earned money in the stock market. Congratulations! The fact that you have earned (and continue to earn) this kind of money is a sign of intelligence, and as such you should find success in the stock market a little ways down the road. The key part of that sentence is “down the road”. The stock market can be a cruel mistress, and she will not hesitate to take all your money if you are unprepared. The first, and perhaps most important, lesson is: Take Your Time. We’re talking about your own money here, money that you can surely lose if you are unprepared. Which brings us to the next tidbit: Only Invest What You Can Afford to Lose.

It’s very important that you understand going into this game that you 100%, absolutely *can* lose your money. There’s no such thing as a “sure thing”. A quick look at some of the worst performing stocks of 2011 will quickly emphasize this point: Netflix, RIMM (the makers of Blackberry) and Sodastream all lost over 50% of their value in a single calendar year. Their stock holders got crushed. And that’s just a few of the companies that crashed and burned. There are countless cautionary tales of companies that were riding high and had the rug pulled out from under them. Penthouse to the Outhouse. Things can and do happen fast in the stock market, making preparation vital. If you spend enough time researching, you will significantly reduce the risk of having this happen to you.

Once you’ve resigned to the fact that patience is key and that you should never invest what you can’t afford to lose, you’re ready to get into the nitty-gritty of investing: Doing Your Homework. This part, quite frankly, isn’t fun. It’s also what separates the winners from the losers, so you have to decide for yourself which side you want to be on. There are many factors to consider when researching a company:

    • Their financial situation: are they making money? How much money did they make compared to the previous quarter/year? Are they displaying growth or are they stagnant/losing ground.
    • What kind of shape is their industry in? For example, in times of economic downturn, discount retailers (dollar stores) tend to thrive, while luxury retailers may suffer. If the housing market is down, you might want to stay away from construction companies, etc.
    • Who is running the company? What are the backgrounds of the CEO/CFO? What companies did they work for in the past and what type of results did they generate? Management can make or break a company—don’t overlook this.
    • Did they give any guidance when they released their latest financial results? Public companies release their financials once per quarter and will often times accompany these results with a conference call (that you can listen to) and/or release a written statement where they discuss the past quarter and offer their thoughts on the future. This can be very telling—if the CEO is warning of possible a slowdown in business, this could be a red flag and might something to avoid.

I’m just scratching the surface of the kind of homework that is required in order to properly gauge whether or not you should buy a particular stock. As mentioned previously, there is no shortage of experts online and on TV that will tell you exactly what you should be paying attention to. The bottom line is this: there is no magic formula for analyzing a stock. You can perform all sorts of complex mathematical equations, analyze charts, research until your head explodes—anything can and will still happen. The point is this: before you buy stock in a company, make sure that you are comfortable with the decision. Do what *you* think is the right amount of homework, no one can tell you the right amount. As long as *you* believe you’ve put the work in, that is what matters most. Of course, there are still other things to consider before actually pulling the trigger and buying stock. Check out Part 2 for more thoughts to help you maximize your profits.

About BestOnlineTraders

The goal of BestOnlineTraders is to help new investors get off on the right foot. We don't claim to have all the answers to all the questions, but we feel like this site is a great place to start out if you are new to investing. The stock market is a complicated, intimidating entity, complete with complex terminology and calculations. As a new investor, your goals should be to get a grasp on the basics--the fundamentals, if you will. This is what we offer our readers.

There are many sites out that that are packed with information. The problem is that for the new investor, this can be information overload and overwhelming instead of educating. Start slow. Read our introductory articles, browse our online trader reviews and you'll be off to a good start. You will then be ready for more thorough discussions of the more complex aspects of investing, and we have some excellent links right here to help you.

Thanks for visiting, and good luck!

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