So you have heard that the market is making new highs everyday (or at least seems that way), and you would like to participate in the rally. You wonder, how do I do that? Well, this page is intended to provide some basic information on how to start investing in the market.
First thing first, keep in mind that the market does not offer any guarantees. The fact that an analyst recommends a stock does not mean that the stock is going to go up. Keep in mind that INFORMATION is your best friend in the market. Study the company before you invest. Another important tool of making money in the stock market is patience. The fact that you buy a stock does not mean that the price has to go up! Many novice investors would sell at the first sign of a softness in the price. When the price goes up again they blame themselves for not having enough patience. But the next time they buy a stock, they repeat the same mistake again.
There are two basic types of brokerage firms:
Full Service Brokers: They offer you advise on what to buy, when to buy, and what not to buy. Naturally, they charge for their advise. Many times they also have a set of quota to meet, so be careful when you listen to their advise. They may also have a vested interest in selling a certain security since most of the IPOs are offered by full service brokerage houses. They have a research department that searches the market and locates stocks that they believe are ready to move up. Keep in mind that you pay for that research. There is nothing wrong with that provided you know that.
Discount Brokers: These companies do not offer any kind of advise. They just execute your order. In this category you have “Deep Discount Brokers” such as Ameritrade and E-Trade and the “Not So Deep Discount Brokers” like Schwab or Fidelity. Besides the speed of execution and access to their system, Discount Brokers are pretty much the same.
There are two types of brokerage accounts: 1) Cash Account; and 2) Margin Account.
Cash Account refers to those accounts that require cash up front and your trading capacity is limited to the amount of money available in your account.
Margin Account refers to those account that require cash up front but your buying limit is twice as much as the cash available in your account. In these accounts, you borrow money from your broker to buy stocks. You will use the stock itself as collateral. Typically in order to Sell Short, you are required to have a margin account. The interest rate charged on these accounts varies from one brokerage house to the next. Options can not bought on margin.
DOs and DON’Ts
– Do your own homework. Gather as much information as you can on a stock. Do not be afraid to call the company and ask their Investor Relation Department about the company’s product, earning and other such information. After all, you are getting ready to own part of the company. You need to know what you are buying. I am amazed that most people spend more time researching a $400 lap top purchase than a $2,000 stock purchase.
– Do Investigate the company before you buy. A good friend of mine always investigated the company after he had bought the stock. Needless to say many times he was surprised, not pleasantly either!
– Do be patient when you buy a stock.
– Do set an exit price for yourself. If you make a bad trade, take your losses and go on. Do not hope that the stock will go up tomorrow. Many times, that tomorrow never comes.
– Do not buy a stock because a friend of your friend has made a lot of money on that stock. Many times, you will end up losing your money.
– Do not buy because someone had a Hot Tip. More often than not, the hot tip is a luke warm tip at best.
– Do NOT buy at the market open. I repeat NEVER buy at the market open. You always get a pop at the market open which fades away in an hour or two. The best time to buy a stock is about 45 minutes to an hour into the market and late in the afternoon, about 30 minutes before the market closes. Conversely, the best time to sell is at the market open or about 1:00 p.m. Eastern time. Look at daily chart of any stock. You will be surprised at the similarity of the price fluctuations.
– Always have discipline on when to buy and when to sell. Do not act on emotions. Leave your emotions out of your investments.
– Always know your time frame for a stock whether it is a day, a month, a year or long term.
– Last but not the least, Hope that Luck will be with you.
Know when to take your profits!
As a rule of thumb, it is always a good idea to set a target for your profits. Many times, people stay in a stock that has gone up for too long, thinking that the price appreciation will continue indefinitely. Be wise! Lock in profits. Remember the old adage that “you never go broke by taking profits”. A 10% gain is probably a good place to start locking in profits. You can always come back and buy again.
Here is another important point. Know what you want to be! a trader or an investor! If you are an investor, you should not be bothered by a normal price fluctuation in a stock price. Your time horizon is longer than a trader. If you are a trader, you are working on a very short time period. You should take your gains and losses at the end of your previously designated time period whether it is a day or a week. The worst thing that one can do is to be a trader/investor. The latter type people, usually do not take their profits when they have them. Instead, they register their losses when a stock that they had bought goes down. Be disciplined!