Investing 101


Let me begin this post by saying that I am by no means a seasoned investor and my advice might not be as complete as someone who has been investing for 20 or 30 years. That being said I do not believe that investing is rocket science, and I do believe that the average Joe has the ability to earn returns on their money that can match – if not beat – the returns that the “professionals” achieve. Truthfully it’s really not all that difficult to do. There are just a few things one needs to remember when they begin investing.

  • Investing is not gambling; luck should never be something that you rely upon when choosing an investment.
  • Investment decisions should never be made without doing any research.
  • One should never buy into a stock or fund when everyone and their grandmother is telling them how great an investment is and how it is going to make EVERYONE rich.
  • Always diversify your portfolio (i.e. invest in more than one industry and/or stock type)
  • Determine your level of risk tolerance (how much risk are you willing to take on?)

Choosing a stock to invest in requires first choosing a few companies in which you are interested, researching the companies and finally (this is the easiest part of all) purchasing the stock from your brokerage of choice.

Choosing a stock to research

The first step to investing would be choosing a few stocks each from different industries that you are interested in, or you could go about it by merely choosing companies that you do business with, determining their industry of business and finding out who their competitors are. For example let’s say that I am interested in the Oil Industry, the Retail Technology Industry and the Restaurant Industry. These are just three industries I picked off of the top of my head, but they do a good job of diversification considering that different economic events would not all have the same affect on these three different industries. Now that I have chosen a few industries I would want to think of a few companies that I know in these industries. For Oil I will choose Exxon Mobil (ticker: XOM) and Chevron Texaco (CVX). For Retail Technology I will choose Best Buy (BBY) and Radio Shack (RSH). Finally for Restaurants I will choose Cheesecake Factory (CAKE) and PF Changs (PFCB).

Researching your chosen companies

Now that I have chosen these few companies in each of my selected industries I would want to do some research on them and compare them to other companies in their same industry. This part is probably a little bit more time consuming than choosing stocks to research or purchasing them, but is also the most important step in investing. Just as a quick note, if you are not willing or do not have the time to do periodic research on your investments, such as reading earnings reports then stocks are probably not the best choice for you. If this is the case you might be interested in investing in one of the hundreds of mutual funds available out there. These funds are based on a diversified index of stocks such as the S&P 500 and would earn you the historic average of 8-9% a year.

Before we dig into research ideas I’d like to introduce you to a few of my friends, who if you are serious about investing will soon become your best friends also. My friends are finance.yahoo.com and moneycentral.msn.com. These sites should be all you need to do some basic research (and view results of research already completed) on your chosen stocks.

Because this is just a basic overview of investing and research I won’t go too deeply into the different methods of researching, but will instead just skim over some of more traditional and basic things to look up and compare. You’ll want to look up your companies P/E ratio, which means price to earnings ratio. Basically this ratio compares the current stock price of a company with its earnings. Traditionally the lower the number the more of a value the companies stock is, but this would not always hold true, for example P/E ratios between industries would not be a good thing to compare. As an example you would not want to compare the P/E ratio of Exxon Mobil (XOM) to that of the Cheesecake Factory (CAKE). Other things you can research and compare are sections of your chosen companies financial statements. It’s always a good idea to see how well the company is doing in bringing in revenue, how much debt they have and how well they are doing at paying it off and how effective they are at increasing revenues and decreasing expenses.

Let me just leave you with one other quick note on researching: I asked my friend Josh (who is a successful investor/day trader) if he had any advice other than what I’ve already mentioned and he mentioned how “you should never invest in a company that you don’t understand. If you don’t know how AAPL (Apple, Inc.) makes money or what their products are then you should not be investing in it… Research and then invest in companies that you understand.”

Purchasing your chosen stocks

Now that you have a good idea on how to choose companies and do a little bit of research on them you’ll want to open an investment account of sorts. The company that I used when I first began investing is Sharebuilder. I like a few things about Sharebuilder. I like that they make it easy to set up automatic investing plans, I like it that you can purchase stocks in dollar amounts instead of only per share price and I like it that their trading fees are extremely well-priced. It is for these reasons that I’m going to say that if you are just starting out then you might consider Sharebuilder. As you can see there is a large banner right below. As a disclaimer to you, my readers, I will let you know that if you click that banner and sign up for service with Sharebuilder and fund your account I will receive a commission. I do this to try and earn enough money to pay for my hosting and also because I’m hoping I’ll be able to raise enough to return some to you, my readers, in the form of contest prizes and what-not. We shall see how this second idea develops in the future. In the meantime if you disagree with providing me with some support by clicking on that affiliate banner please feel free to follow this link to Sharebuilder.

ShareBuilder- Welcome page

Also if you are not interested in Sharebuilder as much as a traditional broker you might try Scottrade or Etrade.

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