How to Invest in Stocks

everyone wants to be financially secure. If you have a house, your house may be
your biggest "asset" early on, but you will need to live in it for the rest of your
life. Do you want a financially secure retirement or a vacation house in the South
Pacific? You must invest your savings if you plan to retire.

Steps
1. Save. Before you can invest, you need money. Don't start investing until you
have a secure job and (6) six to (12) twelve months of living expenses in a 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.

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, aim to read every book on investing you can get your hands on.

Here are some of the very best books and resources for all serious investors:

The Intelligent Investor by Benjamin Graham. Get this on audio CD, listen to it a
few times and it will make a lot of sense. Focus especially on Chapters 8 (market
fluctuation) and 20 (margin of safety).

The Interpretation of Financial Statements by Benjamin Graham and Spencer B.

Meredith. This is a short and concise treatise on reading financial statements.

Security Analysis by Benjamin Graham and David Dodd. This book is considered the
bible of investing and will tell you how to analyze corporate finances thoroughly.
You don't have time NOT to read it. Get this book now, and master everything in
this book. That being said, due to its age (it was published in 1934, just after
the stock market crash of 1929), it lacks some modern aspects; in particular, it
does not tell you anything about the cash flow statement.

Expectations Investing, by Alfred Rappaport, Michael J. Mauboussin. This highly

readable book provides a new perspective on security analysis and is a good
complement to Graham's book.

Common Stocks and Uncommon Profits (and other writings) by Philip Fisher. Warren
Buffett once said he was 85 percent Graham and 15 percent Fisher, and that is
probably understating the influence of Fisher on shaping his investment style.

One up on Wall Street and Beating the Street, both by Peter Lynch. They are easy to
read, informative and entertaining.

The Essays of Warren Buffett, a collection of Warren Buffett's annual letters to

shareholders. Warren Buffett made his entire fortune investing, and has lots of
very useful advice for real people who want to invest.

Warren Buffett has provided these to read online free:

www.berkshirehathaway.com/letters/letters.html.
If you have some time left, you should also read Buffett's early letters to his
partners from 1956 to 1969; they can (for example) be found at:
www.ticonline.com/buffett.partner.letters.html.

Buffettology, The New Buffettology and The Tao of Buffett, all by Mary Buffett and
David Clark. These are basic books on the investment methods of Warren Buffett. The
New Buffettology can be purchased on audio CD.

3. "Value Investing: from Graham to Buffett and Beyond", by Bruce Greenwald is a

concise summary of the valuation techniques to value assets, earning power, and
growth, as well as profiles of several successful value investors.

For a better biographic insight of Warren Buffet, read Buffett: The Making of an
American Capitalist by Roger Lowenstein. This book will tell you how Buffett
refined his investment style over the years and who he is.

The Secret Code of the Superior Investor, by James K Glassman. This is an excellent
treatise on the importance of buy and hold.

Motley Fool and The Tycoon Report, both excellent online publications.
Wikinvest.com is a great place to find information on companies and concepts in the
market. It is also helpful to conduct due diligence on the investment information
sources themselves. Check out the performance and advice of websites, newsletters
and blogs. One resource to conduct this research is at Greedreviews.com .

4. Think. Warren Buffett says that after you think, then think again. Warren
Buffett says that if he cannot fill out on a piece of paper several reasons to buy
a stock, then he will not buy it.

5. Practice. Trade stocks on paper before actually trading 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 a stock market index, such as the S&P 500 or
the Dow Jones Industrial Average. Do not start trading with real money until you
are comfortable with your trading abilities.

6. 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. Discount brokers
generally charge commissions of less than $10 per trade, some as low as $1 per
trade, and some offer a limited number of free trades per year, provided you meet
certain criteria. Other than costs, you should also consider whether dividend
reinvestment is offered (which is the best way to build up your positions), what
research tools are offered, customer service, etc.

7. 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 (earnings per share) 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).

Stay up-to-date with different value investing websites such as Motley Fool or
Fallen Angel Stocks to see what kind of deals are out there.
If you do not have the time or inclination to learn about individual stocks, buying
and holding no-load, low expense index funds forever using a dollar cost averaging
strategy is best and outperforms most mutual funds, especially over the long term.
The index funds with the lowest expensive ratio and annual turnover are best. For
investors with less than $100,000 to invest, index funds are usually best. If you
have more than $100,000 to invest, however, individual stocks are generally
preferable to mutual funds, because all funds charge fees proportional to the size
of the asset. Even the lowest fee index fund, Vanguard Total Stock Market Index
Fund (VTI), has a 0.07% annual expensive ratio. This amounts to only $70 over 10
years for a $10,000 portfolio, but $700 over 10 years for a $100,000 portfolio, and
$7,000 over 10 years for a $1,000,000 portfolio. If the expense ratio were 1.50%
(typical for an average mutual fund), the fees would amount to $1,500 for a
$100,000 portfolio, and a whopping $15,000 over 10 years for a $1,000,000
portfolio. See Decide Whether to Buy Stocks or Mutual Funds for more information
whether individual stocks or mutual funds is better for you.

8. 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.

9. 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.

10. 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 TV channels such as CNBC, or pay attention to any television,
radio or Internet coverage of the stock market. Focus on investing for the long
term (at least 20 years) and not get distracted by short-term gyrations of the
market.

11. Invest regularly and systematically. Dollar 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 at least 20%, move more cash into stocks, and move all
available discretionary cash and bonds into stocks if the stock market drops by
more than 50%. The stock market has always bounced back, even from the crash that
occurred between 1929-1932.

12. Consider selling portions of your holdings as a stock appreciates

significantly, at least 50 percent to 300 percent, based on the 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
Buffett 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.

13. 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.

Tips
Understand 'why' companies like blue chips above turned out to be good
investments��their quality is based on their prior history of consistent revenue
and earnings growth. By being able to identify those types of companies prior to
everyone else, you will be able to reap larger rewards in your investments. Learn
to be a 'bottom up' investor.

Invest in companies that are shareholder-oriented. Most businesses would rather

spend their profits on a new private jet for the CEO than pay out a dividend. A
return on equity (a common statistic) greater than 15%, a 2% dividend and large
cash reserves are evidence of shareholder-oriented companies.

Don't look at the value of your portfolio more than once a month. If you get caught
up in the emotions of Wall Street, it will only tempt you to sell what is probably
an excellent investment. Before you buy a stock, ask yourself, "if this goes down,
am I going to want to sell or am I going to want to buy more of it?"

Companies with strong brand names are a good choice. Coca-Cola, Johnson & Johnson,
Procter & Gamble, 3M, and Exxon are all good examples.

The goal of your financial adviser/broker is to keep you as a client so that they
can continue to make money off of you. They tell you to diversify so that your
portfolio follows the Dow and the S&P 500. That way, they will always have an
excuse when it goes down in value. The average broker/adviser has very little
knowledge of the underlying economics of business. Warren Buffett is famous for
saying, "risk is for people who don't know what they're doing."

Remember that you are not trading pieces of paper that go up and down in value. You
are buying a share of a business. The health and profitability of the underlying
business and the price you will pay are the only two factors that should influence
your decision. (In addition, perhaps, to the social responsibility of the
business).

Always ask, will you make money? Buy and hold for the long term is the best way to
maximize returns from the stock market in the long run.

Companies with virtual monopolies like Microsoft and Wal-Mart are good investments
if you can buy them at a good price.

Buy companies that have little to no competition. Airlines, Retail Stores and Auto
Manufacturers are generally considered bad long-term investments because they are
in fiercely competitive industries, which is reflected by low profit margins in
their income statements. In general, stay away from seasonal or trendy industries
like retail and regulated industries like utilities and airlines, unless they have
shown consistent earnings and revenue growth over a long period of time. Few have.
The share price of a stock has no relation to whether the stock is cheap or
expensive. Refer to Motley Fool, Better Investing and other groups of "value
investors" for advice on determining the fair value of a stock (an inquiry often
discussed as fundamental analysis).

Warnings
Don't blindly feed the dogs, namely, buying the stocks that have had the lowest
returns and appear cheap. Most stocks are cheap for a reason. Just because a stock
that was trading at above $100 and is now trading at $1 does not mean that it can't
possibly go lower. All stocks can go to zero, and many have. Remember, it does not
matter how low you buy a stock, if it goes to zero, you have lost all of your
money. Always do your research before investing in anything.

Do not day-trade or trade stocks for short-term profits. Remember, the more
frequently you trade, the more commissions you incur, which will reduce any gains
you have. Also, short term gains are taxed more heavily than long-term (more than 1
year) gains.

Don't blindly trust the investment advice of anyone, especially who will make money
from your buying and/or selling (this includes brokers, advisers and analysts).

Stick with stocks, and stay away from options and derivatives, which are
speculations, not investments. You are more likely to do well with stocks, but in
options and derivatives you are far more likely to lose money.

Only invest in stocks money you can afford to lose and will not need for at least
15-20 years. Stocks can go down sharply over the short term, but over the long term
they tend to outperform all other types of investment options. If you want to
invest money you will need in the short term (within 5 years or less), consider
bonds instead.

Avoid "momentum investing", the practice of buying the hottest stocks that have had
the biggest run recently. This is pure speculation and not investing, and it does
not work. Just ask anyone who tried it with the hottest tech stocks during the late
1990s.

When it comes to money, people lie to save their pride. When someone gives you a
hot tip, remember that it is just an opinion.

Do not engage in insider trading. If you trade stocks using insider information
before the information is made public, you may face prosecution. No matter how much
money you could potentially make, it is insignificant compared to the legal
troubles you could get into.

Do not buy stocks on margin. Stocks may fluctuate widely without notice and using
leverage can wipe you out. You don't want to buy stocks on margin, watch stocks
plunge 50 percent or so, wiping you out, and then bounce right back and then gain
some. Buying stocks on margin is not investing, but speculating.

Do not attempt to time the market, guessing when stocks hit bottoms or tops.
Nobody, other than liars, can time the market.

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