With stock market news dominating the headlines of late -- Dow up 1,000-plus points, Dow down 1,000-plus points -- it's hard not to get bitten by the investing bug and want to get in on the action. And that's a good thing because this wealth-building tool isn't only available to the wealthy or to the experienced. It's easier now than ever to try your hand at investing.
To do it right, you'll need a bit more than a dollar and a dream, but the odds are good that you're much more likely to meet or even outperform the market than you are to win the lottery. Having some basic knowledge about how it works is a good starting point.
Let's go through some of the basics of what you will need for a solid investment portfolio and how to pick your first stocks for it.
How can I get started?
If you have access to the internet and a few hundred dollars to spare, you're good to go. These days, it's almost easier than throwing a pair of dice, and much less risky.
It used to be you had to contact a brokerage firm and hire a stockbroker who would decide (or steer your decision on) where you should invest. With all of the information and services available to individuals today, especially from the keen folks at the Motley Fool, you can take control of making excellent decisions that suit your investing style.
The first thing is to decide what level of risk you are comfortable with. Higher risk investments have a greater opportunity for high rewards, but also for losses. Most beginner investors should avoid high-risk choices until they have a solid understanding of the market and have enough cash to diversify into different types of investments that help manage the risk of an individual stock purchase.
The good news is that there's an abundance of ways to invest your starting funds in what would be considered safer stocks that can still provide high returns. And that should be the initial focus.
Look around you
One piece of investing advice that many first-time traders follow is to buy stock in companies that you already know and like. Are you into fitness? You might want to investigate Nike or lululemon Athletica. Do you enjoy eating out? Have you enjoyed a good meal at Texas Roadhouse or McDonald's? Stock from these companies might be a winner for you. Were you impressed with the theme park operations when you took your kids to Disney World? Or have you seen every Pixar movie ever made multiple times? Check out Disney stock.
The point is that you should consider businesses that come up in your own life because these are companies that you know something about. You won't be able to invest confidently in a company that you read about but don't really understand.
This is also potentially a way to spot great companies while they're still in growth mode. Take notice of innovative products that are filling needs for your family or community and offer great customer service. They could be the next Netflix.
Do your research
Once you've found your inspiration, the next step likely involves some figurative perspiration. It's not enough to know or even like a company; you want to feel some security that your investment is going to pay off. That means doing a bit of investigation into the company's financials.
While all publicly traded companies post their financial information online, what is provided there may be confusing for beginner investors who don't know that much about income statements, earnings reports, annual reports (10-Ks), and balance sheets. Still, taking a look at a few quarterly reports will give you a sense of where a company has been and where it's going, and you'll learn the ropes along the way. Then you can review some analysis about how to invest.
Let's do a quick review of two stocks that you might be considering. Suppose you love shopping at Target (NYSE:TGT), but you get grocery deliveries from Walmart (NYSE:WMT). You appreciate many of the services both of these retailers offer and are considering buying stock. Here are questions to think about:
- Are their sales growing year over year? A company might be making billions in revenue, but if the number is going down on a yearly basis, the company will lose the confidence of investors.
- Does the company have free cash on hand? This is important in case financial difficulties arise at some point.
- Is the company making a profit? Revenue might look good, but if the company can't manage to turn that top-line revenue into bottom-line earnings, the company's operational model will eventually fail.
With these questions in mind, here some of are our stock candidates' cursory financials for 2019:
|Company||Annual sales growth||Annual earnings per share||Free cash, end of year|
What we find are two solid companies that know how to make sales, turn them into profits, and keep cash on hand. Target outperformed Walmart in 2019, according to these metrics, but there might be other factors that explain the differences and make Walmart a better buy (or a better buy for you).
Further detective work is needed
After some further detective work, you might decide to invest in both of these companies because they both offer the chance for growth. Just remember that, if you're just choosing a small number of stocks to start out, you might instead choose one general retailer and complement that choice with companies in other industries to strengthen your portfolio diversity.
Keep in mind that you shouldn't expect to see great returns from every stock in your portfolio, which is one of the main reasons to diversify. But if you have chosen well, you should see success with enough of your holdings to offset any potential losses from picks that didn't work out. That doesn't mean you need a huge assortment (especially at the beginning), just a few stocks that work together in your favor.
With the troubled and volatile stock market offering discounts on lots of great companies, now is the perfect time to get started.