One of the first questions any beginning investor asks is how to get into stocks in the first place. The answer is a lot like learning to swim. You want to get into stocks gradually and limit your risk -- dip your toes in the water and stay in the shallow end, as it were -- before trying to execute a reverse somersault dive with two and a half twists.
Let's take this one step at a time.
Dip your toes in the water
Much like a beginning swimmer approaching the edge of a swimming pool, the stock market looks like a pretty scary place. At first. It's not a familiar environment. It's not a place you've been before, and you don't know quite what to expect once you first get into stocks. You don't know how to swim before you start paddling, and you probably don't know how to invest before you pick your first stock, either.
Or rather, don't try to pick a winning stock on the very first day you start investing. Instead of trying to pick the best stocks, consider buying all the stocks at once. You can do this by buying an exchange-traded fund, better known as an ETF, that represents a stake in all 500 of the largest companies on the S&P 500 index of stocks. The Vanguard S&P 500 ETF (NYSEMKT:VOO), iShares Core S&P 500 ETF (NYSEMKT:IVV), and SPDR S&P 500 ETF Trust (NYSEMKT:SPY) are three popular ETFs that will do this for you.
It doesn't really matter which of these ETFs you buy. Each charges a very reasonable expense ratio of less than one-tenth of 1%, guaranteeing that whether you buy the Vanguard S&P 500 ETF, iShares Core S&P 500 ETF, or SPDR S&P 500 ETF Trust, you will enjoy gains very similar to what the 500 companies in the S&P 500 enjoy.
Stay in the shallow end
Once you've dipped your toes in the water by buying your first ETF, just sit there for a while and get used to the sensation of being "in the market." Watch how the value of your investment goes up and goes down from day to day, and get yourself comfortable with the idea that investing in the stock market can cause you to lose money as well as gain money.
Perhaps you'll decide you don't like that sensation at all and want to get back out of the pool. That's fine.
But if you stay long enough, you'll discover that over time, the stock market tends to rise in value more than it falls. Eventually, you may get the urge to find out if you can pick stocks that will rise more than the average -- but again, I'd urge you to start slow.
Pick one company you really like and that you think might do better than average, and buy that one stock. Now you have a couple of things to compare. Over time, does the stock that you picked do better than the S&P 500 ETF that you bought? Or does your stock do worse than your ETF?
Reverse somersault dive with two and a half twists
If the stock you picked does better than the ETF -- then hey, you just might have a knack for this stock-picking thing. You might be ready to move beyond just knowing how to invest, and be ready to begin picking a few more of the best stocks in the market. Your interest piqued, you might be ready to start discovering the differences between earnings and free cash flow, learn how to read a balance sheet, and decide whether you prefer dividend stocks or growth stocks.
Conversely, if the stock you picked does worse than the ETF (and it may take a few weeks, or months, for the difference to become obvious), then you might be better off sticking with owning broad-based index fund ETFs. Or, you might decide that you need to educate yourself a little bit more before buying your next stock. The important thing is that by this point, you will already know how to get into stocks and be able to make an informed choice about whether you want to stay there -- and exactly how deep you want to dive in.