The No-Risk Way to Learn to Invest

If you're an investing beginner, the prospect of putting your money at risk can scare you to death. To get yourself used to how the stock market works, you might want to give your investing strategies a practice run before you actually invest real money.

Enter mock portfolios
While you get comfortable with the mechanics of investing (such as researching companies and deciding when to place your buy and sell orders), you can see how your decisions play out, though it might just be over a short period. (Remember that you shouldn't necessarily draw many big conclusions from how a stock or the market behaves over a few months or even a year or two.)

To build a mock portfolio, just set up an online portfolio, which you can do for free at many sites, such as AOL or Yahoo! Finance. Enter details such as when you "bought" shares of this or that, and at what price. Then track your performance over time, observing how your holdings behave. This can help you learn more about yourself as an investor.

For example, Rosetta Stone (NYSE: RST  ) shares had a huge one-day drop of more than 27% early last week after the company canceled a secondary offering and predicted gloomy times. If you had invested $5,000 in Rosetta Stone stock shortly before, you'd have lost more than $1,350 in a single day.

Would that kind of quick loss freak you out? If so, you might want to keep reading and learning more about the stock market.

For the experienced
Mock portfolios can also assist more seasoned investors. If you read about some intriguing investment strategy, you might see that it worked well in the past (via some published report based on back-testing), but you might want to see how it works when you try it yourself. You can do a trial run with a mock portfolio.

If, for example, you want to see what happens if you invest in large-cap stocks that have earned a top rating of five stars in our free Motley Fool CAPS service, and that are down more than 40% over the past year, you can do so in a mock portfolio while you deliberate more about the strategy. By the way, here are some of the companies that come up on such a screen:

Stock

1-Year Return

ArcelorMittal (NYSE: MT  )

(48.8%)

Arch Coal (NYSE: ACI  )

(66.4%)

Baker Hughes (NYSE: BHI  )

(52.2%)

Chesapeake Energy (NYSE: CHK  )

(52.1%)

Terex (NYSE: TEX  )

(65%)

Mechel OAO (NYSE: MTL  )

(48.6%)

Source: Motley Fool CAPS.

Of course, if the idea of all of this effort is starting to make your head hurt, know that there are other work-arounds. You can skip mock portfolios altogether and invest in a low-cost stock mutual fund instead. It's very easy, and you can add to it over time. There's no shame in that!

If you'd like to do more yourself, consider letting us help you with your homework. Our Motley Fool Stock Advisor newsletter helps investors by not just giving stock recommendations but also leading readers through the rationale behind picking those stocks. That education can be priceless.

Get all the help you need from our Investing Basics collection. It's absolutely free.

This article was originally published on Feb. 4, 2009. It has been updated by Dan Caplinger, who owns shares of ArcelorMittal and Chesapeake Energy. Chesapeake Energy is a Motley Fool Inside Value recommendation, and the Fool owns shares of Chesapeake Energy. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (2) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 06, 2011, at 6:25 PM, Glycomix wrote:

    The six stocks you've mentioned deal with commodities, like coal, oil, and gas, steel, and industrial/farm machinery and cable (TEX).

    Terex has lost money. The rest have their problems.

    Outside of TEX and ACI the decreased in price since May hasn't been remarkable. They aren't at any 'record lows'. Most have reached the same 'lows' that they had in December to February while Baker Hughes reached a new high.

    Russian(MTL) and Luxemburg Steel (MT) companies have decreased. However, Nucor (NUC) is in the US,isn't hampered by the corruption MTL faces in Russia and has an equally attractive price and forward PEs.

    Arch Coal appears to be at an attractive price. Its problems are in its current ratio of .70 and it's 6.5% profit margin.

    Chesapeak Gas production (CHK) is in the $30 range, down only from it's $36 stock-price highs in March. It does have a 10% profit margin. ( and a 1.16% dividend)

    Arch coal looks like a bargain with a 1.65% dividend. However, the rest have far to go. Cliff's Natural Resources is at a high, but it has a 26% profit margin, and a lower debt load, and only a .56% dividend

    As far as I can tell, there's nothing to distinguish these stocks as remarkable values.

    I'd rather buy Newmont (NEM) with it's high book value, PE and profit margin.

  • Report this Comment On October 28, 2013, at 7:36 AM, shawnafrost wrote:

    Good One!

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