Purchasing your first stock can be about as daunting as taking the homecoming queen on a fancy dinner date. If things go badly, you could end up embarrassed, a few dollars poorer, and a little hesitant to ask out the next pretty girl.
Here's where some people step in and encourage you to "buy what you know." Just like in dating -- "Be yourself!" -- you may have wondered whether that's really good advice. Here's why it can make sense.
Getting a head start
If you're picking stocks, "Buy what you know" encourages you to choose a company you already understand. That's a harder task than you may appreciate. Consider a company like General Electric (NYSE: GE ) . You might think of them when you replace your light bulbs, but this giant multinational's description of its business includes jet engines, financial services, media content, and something called "ecomagination."
Understanding a business is the first step toward figuring out if it's a worthy investment. With a thorough understanding, you'll have a good shot at evaluating the company's products, its competition, and its place in the broader industry.
You can probably generate a list of dozens of such companies if you think about it. Spend a day paying close attention to everything you see or use. Start with the toothpaste and extra-strength deodorant at your sink, and end with the slippers you put on your feet.
Begin at home
Your house is filled with products you deemed good enough to buy. You can't be the only one. Once you look at them, you might be surprised how many come from just a few companies, such as Procter & Gamble (NYSE: PG ) or Kimberly Clark (NYSE: KMB ) .
If you could take only five things to that proverbial desert island, what would you choose? By zeroing in on the products you love, you may have just discovered a company has won the hearts and minds of millions of consumers.
Your friends and neighbors can also be a great source of ideas, but don't pay much attention to their hot stock tips. Watch, instead, for the products they suddenly can't live without. Tune in when you hear your hipster friends buzzing about the Next New Thing. Take note when everyone you know must have a Sony (NYSE: SNE ) Playstation 3 or a new pair of Crocs (Nasdaq: CROX ) .
The things you buy can be a source of inspiration, but you may find your deepest wells of knowledge at work. Anyone who works in a specialized field, in particular, can turn that information into a source of investing ideas. But you don't need to be a rocket scientist to turn your workplace knowledge into investing smarts. You work 40 hours a week at your job, so you probably know a lot more than you realize.
Spend a workday noting every company whose products or services you use at work. Then, make a list of other companies in your industry. You're probably well poised to evaluate them as potential investments.
Now that you have a pretty long list of ideas, choose a few that really pique your interest and find out more. A company's annual report, almost always available on its website, can help you get a better idea about all of the products and services made by a company. Look for it in the "investor relations" section.
An annual report will tell you about the breadth of a company's activities, its philosophy, its activities in the past year, and its plans for the future. Don't get too swept up by the pretty pictures. It's the financial information that should interest you the most.
Just like that, you're on your way toward picking your first stock!
For help with the next steps, keep reading to find out: