You can go your whole life without ever buying a single stock. But until you do, you won't really understand the full potential of investing -- and the rewards that come with it.
If you're a beginning investor, mutual funds give you a great way to get your feet wet. With just a few hundred dollars, you can invest in a mutual fund that will give you instant access to thousands of different stocks. The diversification that comes with broad-based mutual funds brings with it a measure of security. You may still lose a lot if the whole market goes down, but if one particular company gets hurt, it won't have a huge impact on your overall portfolio.
Going for the gold
The diversified portfolios and relative safety of mutual funds, however, also carry a cost. Although an index fund can count on nearly matching the market -- and a well-managed fund can hope to beat it -- mutual fund investors pretty much give up on earning the truly outstanding returns that individual stock pickers look to achieve.
And those returns really can be amazing. While the tech-heavy Nasdaq 100 has risen a respectable 62% over the past decade, Apple (Nasdaq: AAPL ) is worth 27 times what it was worth in 1998. And although the S&P 500 has risen 10% per year since 2003, Cognizant Technology Solutions (Nasdaq: CTSH ) has grown more than 42% over the past five years.
How to start
But before you can walk, you need to learn to crawl. With investing, that means going beyond the cradle of mutual funds and looking at some individual publicly traded stocks that have fairly simple business models. Here are a few to consider:
- Costco Wholesale (Nasdaq: COST ) . This down-to-earth retailer is easy for beginners to understand. By selling cheap but buying cheaper, Costco can undercut most traditional retailers, while simultaneously building a loyal customer base that returns again and again to find the latest bargains.
- eBay (Nasdaq: EBAY ) . It's hard to imagine a more straightforward way to make money. eBay attracts buyers to its online auction site, so sellers are willing to pay auction fees for access to those buyers. Seems easy, but competitors have been struggling to find an answer to eBay's groundbreaking service for over a decade with no success.
- Coca-Cola (NYSE: KO ) . Coke has been turning fizzy water into big money for over a century. Despite ongoing challenges from rival beverage-maker PepsiCo (NYSE: PEP ) and others, Coke still has a dominant position throughout the world.
- McDonald's (NYSE: MCD ) . The golden arches span the globe, and growth opportunities abroad haven't slowed down one bit. In fact, as food prices rise and consumers become more value-conscious, Mickey D could easily see gains as former upscale restaurant patrons reacquaint themselves with the Big Mac.
If these stocks appeal to you, start smart before you invest. Annual reports, available on most companies' websites, will give you a thorough snapshot of current business prospects. Look at financial statements with an eye toward gauging company strengths and weaknesses. And don't stop there -- keep up-to-date by reviewing quarterly results and monitoring news.
And if you want help, there are plenty of resources you can use. Take a look at the Fool's discussion boards and get connected with others who are looking at the same stocks you are. For expert analysis and commentary, a free trial to our Motley Fool Stock Advisor newsletter is a good place to start, with information that's easy to understand and resources that will help you become a better investor.
Most importantly, don't let fear stop you from buying your first stock. Moving beyond mutual funds will open up a whole new world of investment opportunities for you.
For more on getting started, read about: