You’re Losing Money Using a Savings Account: Stock Market for Beginners

This post is written for stock market beginners who want to start investing in the stock market but doesn’t know how and would like to be given a lil booty tap in the right direction.

I started my first investment account late in 2008, when I was 22. My friends were impressed, as if I had become some wise sage to take on the stock market. To them it was something that they “would learn later” because it was “too complicated”, something more capable for their adult brain. The bottom line is that you should be investing your money in something other than a savings account (you’re usually losing money when you compare the interest rate from a savings account and the rate of inflation) and the stock market is a great way for someone who doesn’t have a lot of money to start. Today’s technology makes investing in the stock market for beginners easy. The hard part comes when you decide what companies or funds to invest your money in. Below I will share some tips that keep me on track, and at the end of the post I’ll go more into my investments.

Research

  • You must research a company before you put money into it
  • You should buy a stock because you know a lot about the company, not because it’s at a cheap price.
  • The best stock to buy may be the one you already own. Don’t pick a different company just to give yourself another quote to look up on your iPhone.
  • Never invest in any idea you can’t illustrate on a napkin.
  • The dividend represents the success of many stocks and you could hardly go wrong by making an entire portfolio of companies that have raised their dividends constantly for the past 10 to 20 years in a row.
  • If you like the store, chances are you’ll like the stock.
  • You should review your portfolio at least once a year. This is an easy way to do that: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can’t find a reason, then ask yourself why you should hold onto it.
  • You can beat the market by ignoring the heard.
  • Rejecting a stock because the price has doubled, tripled, or even quadrupled in the recent past can be a big mistake. I try to “live in the now” and treat each potential investment as if it had no history.
  • Wait until a smaller company is turning a profit before you invest.
  • The observant amateur can find great growth companies long before the professionals have discovered them.
  • Not researching a company before you invest is like betting before you see your hand in poker.
  • When investing in food: if a company tries to open more than 100 new units a year, it’s likely to run into problems of trying to grow too fast.
  • When you invest in the stock market, you should always diversify.

Emotions

  • Never fall in love with a stock, keep an open mind.
  • Constantly switching your money from one fund to another to ride the wave is an expensive habit that is harmful to your net worth.
  • There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it, when the fundamentals are deteriorating. No matter what price you pay for a stock, when it goes to zero you’ve lost 100% of your money.
  • Stock-picking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurements, who has his head stuck in the sand of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now.
  • It pays to be patient, and to own successful companies.
  • Long shots almost always miss the mark.
  • A stock-market decline is as common as rain in Seattle. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in a panic. September 2008 marks the date of the financial crisis due to packaged subprime loans, and I saw a great opportunity to pick up some deals while prices were hitting all-time lows.
  • Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
  • The stock market can test your patience, but if you believe in a company, you hold on until your patience is rewarded.

Risks

  • This isn’t a casino – I wouldn’t call the stock market gambling—as long as you’re doing your due diligence to pick good companies, not just looking for low prices.
  • You can lose money very quickly, but it takes a long time to make money.
  • You should invest in several stocks because out of every 5, you’ll have one that will be really good, one that will be really bad and three that will be ok.
  • Just because a stock goes down, doesn’t mean that it can’t go lower.
  • If you can’t tolerate seeing your stocks lose 50% of their value, you shouldn’t own stocks.
  • If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. It’s a good idea to diversify by owning a few different kinds of funds, with managers who pursue different styles of investing.

These are the tips that I try to live by trade by trade. Currently, I have both a Complete Investment Account through E-Trade (opened late 2009) and a Roth IRA (opened in late 2008) through Morgan Stanley Smith Barney. The E-Trade account is used for shorter term investments that I can withdraw money from without penalty (except capital gains taxes), while the Roth IRA is for long term investments that I can withdraw once I reach 59.5 years with no capital gains taxes. Just by using the tips I have outlined above I have managed to create two positive portfolios. My Roth is at +33.1% and my E-Trade account is at +9.89% as of April 3, 2011. One of the few tips that I haven’t lived by is the diversification tip. My knowledge lies in technology and biomedical engineering and my investments reflect that. I try to invest a chunk of money every 6 months and the next round will involve investments in Domestic (US) stock funds, in the small to mid-size growth range. Funds are a great and easy way to diversify your investments and you can visit msn money to see the top-performing funds for ideas.

Tap, tap, there you go my timid little stock market beginner.

Are you new to investing or even a seasoned veteran? What tips do you have to take advantage of the stock market as an investing option?

Disclaimer: The information provided in this post is for assistance only and is not intended to be and must not be taken alone as the basis for an investment decision.

Photo via artemuestra.

Leave a Reply 2 comments