Steps to Help you in Investing in Stocks
1. Savings
You need money, before you start investing.
Don't start investing until
a. You have a secured job
b. 6 to 12 months of living expenses in your savings account, as an emergency fund, in case you lose your job.
Learn how to budget your money and to spend your earnings wisely. Most investors have to be careful not to spend any of their profits, and to keep some aside for future use, and for retirement, as well as emergencies.
Be prepared to always live within or even below and not beyond your means. This will help to ensure that you always have enough money with you.
2. Read
Before you start investing, you need a basic understanding of what a stock is, what it means to invest, and how to evaluate stocks. Get some basic books in stock investing. Make a goal to read every book on investing you can get your hands on.
3. Think
Warren Buffet says that after you think, then think again. Warren Buffet says that if he cannot fill out on a piece of paper several reasons to buy a stock, then he will not buy it.
4. Practice
Do paper trading before you actually start trading in stocks with real money. Record your stock trades on paper, keeping track of dates of the trades, number of shares, stock prices, profit or loss, including commissions, taxes on dividend, and short or long term capital gains taxes you would have to pay for each trade. It is also helpful to record the reasons for each buy or sell decision. Calculate your net profit or loss less commissions and taxes for a meaningful period (1 year or more) and compare your results with the market index, such as the S&P 500. Do not start trading with real money until you are comfortable with your trading abilities.
5. Open a stock brokerage account with a discount broker.
No specific recommendation can be offered here, as the stock brokerage business is a rapidly changing field. Trial and error is probably the only way to find a good broker, but you should do your own due diligence by checking out their site and looking at reviews online. The most important factor to consider here is cost, namely, how much commission is charged, and what other fees are involved.
The current maximum intraday brokerage offered is 0.05% for buying and 0.05% for selling.
6. Build a small portfolio of 10-50 stocks.
Blue chip stocks are stocks of market leading companies known for quality, safety, and ability to generate profit in good times and bad, although they are generally fully priced and difficult to buy at a bargain price except in a severe bear market. Choose stocks of companies with proven records of profitability with at least some earning in each of the past ten years, pay at least some dividend in each of the past 15-20 years, at least 30 percent EPS growth over the past 10 years (using 3-year averages to smooth out variations, for example, average EPS for years 2008-2010 compared to average EPS for years 1998-2000), low debt to equity (less than 1), and high interest coverage (at least 5).
Keep yourself updated with other investing websites and news.
7. Hold for the long term, at least 5-10 years, preferably forever.
Avoid the temptation to sell when the market has a bad day or month or even year. On the other hand, avoid the temptation to take profit even if your stocks have gone up 50 percent, 100 percent, 200 percent, or more. As long as the fundamentals are still sound, do not sell. Just be sure to invest with money you don't need for five or more years. However, it does make sense to sell if the stock price appreciates too much above its value (see below), or if the fundamentals have drastically changed since purchase so that the company is unlikely to be profitable anymore.
8. Hold on to the winners and do not add to the losers without good reason.
Peter Lynch said that if you have a garden and every day you water the weeds and pick the flowers, that in one year you will have all weeds. Peter Lynch said that he was the best trader on Wall Street for 13 years because he picked the weeds and watered the flowers.
9. Avoid stock tips.
Do your own research and do not seek or pay attention to any stock tips, even from insiders. Warren Buffett says that he throws away all letters that are mailed to him recommending one stock or another. He says that these salesmen are being paid to say good things about the stock so that the company can raise money by dumping stocks on unsuspecting investors.
Likewise, don't watch CNBC or pay attention to any television, radio or internet coverage of the stock market. Focus on investing for the long term, 20 years, 30 years, 50 years, or more, and not get distracted by short term gyrations of the market.
10. Invest regularly and systematically.
Rupee cost averaging forces you to buy low and sell high and is a simple, sound strategy. Set aside a percentage of each paycheck to buy stocks every month. And remember that bear markets are for buying. If the stock market drops by 20 percent or more, move more cash into stocks, and move all available discretionary cash and bonds into stocks if the stock market drops by more than 50 percent. The stock market has always bounced back, even from the crash that occurred between 1929-1932.
11. Consider selling portions of your holdings as a stock appreciates significantly, at least 50 percent to 300 percent, based on quality of the stock.
Use upper limit for better quality stocks.
Letting your winners run as long as the story is still good will increase your long-term chance for success. Warren Buffet says that you should hold winners forever, but if the price-to-book gets too high (above 100 is definitely too high), you should consider selling the stock.
12. Consult a reputable broker, banker, or investment adviser if you need to.
Never stop learning, and continue to read as many books and articles as possible written by experts who have successfully invested in the types of markets in which you have an interest. You will also want to read articles helping you with the emotional and psychological aspects of investing, to help you deal with the ups and downs of participating in the stock market. It is important for you to know how to make the smartest choices possible when investing in stock, and even if you do make the wisest decisions, to know how to deal with loss in the event that it happens.
