The Best Investing Strategy for Beginners-Part 2: Buying the first stock

In the first post in this series I went through the basics of finding a broker and setting up an account for investing.  Today I’ll talk about finding the first stock in which to invest.

Many people will tell you to buy something you know.  People often think of McDonald’s, Microsoft, Google, or some other company they deal with each day.  The trouble with this strategy is that you are probably buying a large, well established company that had little room for additional growth.  In addition, just because you’ve heard of the company doesn’t mean that they are running their business well or that their shares have not made a large run-up lately, meaning that they are likely to fall back down.

Another mistake is to buy whatever is being touted on CNBC, the business section of the  your local paper, Money Magazine, or the Wall Street Journal, or getting a “tip” from a friend.  In the case of CNBC and the papers, even if the pick is good there will be thousands of other people reading the same paper or watching the same show.  If they also rush out and buy up shares the stock will go up in price, leading to you entering at too high a price.  In general stocks that are touted int he popular media will shoot up in price, only to slowly sink back after the hype has died down.   The tip from a friend may cost you a friend if things go badly.

The best way to find good stocks is to look for companies that have shown long-term growth in earnings, and consequently long-term growth in price.  You wish to find a stock that has seen earnings go up year-after-year at a nice steady pace.  You also want to pick stocks that still have plenty of room to expand.   In general these stocks will also have been going up steadily in price.  (In a future post I’ll discuss sources of information to help choose stocks).

Once a selection is made it is just a matter of calling your broker and placing an order (or entering the information online).  (In the next post I’ll give details on how to enter the stock order. )

Don’t expect the stock you choose to shoot up the day after you purchase it.  Also realize that drops in price of 10%-20% or more are also possible – remember that stocks are very volatile which is why the return is so much beter than guaranteed investments like bank accounts. 

Focus on the long-term and the fundamentals of the company.  If a company is doing well, the price will eventually rise.  Also, don’t be disappointed if your first pick is a dud – this is a learning experience.   In later posts I’ll discuss the next steps to take after the first inevstment. 

Start of series:

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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