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 over time. This can help you learn more about yourself as an investor.
For example, General Electric (NYSE: GE ) shares recently had a huge one-day drop after the company reported disappointing quarterly earnings. If you had invested $5,000 in GE stock shortly before, you'd have lost more than $500 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 reasonably 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 70% 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:
- Coventry Health Care (NYSE: CVH )
- Sigma Designs (Nasdaq: SIGM )
- SandRidge Energy (NYSE: SD )
- Manitowoc (NYSE: MTW )
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. You might simply invest in a broad-market index fund, such as one based on the S&P 500. It's very easy, you can add to it over time, and it will outperform the majority of managed mutual funds. There's no shame in that!
If you'd like to aim higher, though, consider letting us do much of your homework for you, via our investment newsletters. Our Motley Fool Stock Advisor newsletter, for example, has been around for more than five years, and its picks are, on average, trouncing the market -- even this recently pathetic market. Try it for free and you'll be able to read about every recommendation.