Lots of people think they can't invest, aren't smart enough to, don't have enough money to, or just aren't qualified. To first address the money concern--you don't need very much money to invest. If you have $1000 in a savings account sitting around, you could be making much more than the .01% interest rate your bank gives you.
In 2013, the S&P 500 gained 29.6%. If you had invested that money in moderately decent stocks, you could have made at least $100. In an S&P 500 ETF¹, you would've made more like $250! That's crazy! Albeit, most years don't have this large of an increase, but the point remains that leaving your money sitting around is doing no one a favor. Currently, the cost of executing a trade is fairly high, but a free trading service is on the way.
Investing is not that hard. If you blindly buy a stock, you will either make or lose money. There are only 2 options for how the stock can behave, so you just have to decide which one you think has a higher likelihood. Investing is merely informed guessing.
“Oh,” you think, “but I am not qualified to guess!”
You know, that may very well be the case. But you can pretty easily become qualified. Here is a guide to beginning to invest:
1) Stick to what you know (at first). Stocks exist for virtually every single type of company out there. What do you like? Fashion? Sports? Entertainment? Think about the industries you know about. What companies do you think are doing a great job?What trends in these industries will be important? Using fashion as an example, you might decide that you think online retailing and shopping will be very important in the future. With this in mind, you can think about what companies do a great job with online shopping. Some of the best investments are for average companies that make staples like paper towels or provide cell phone service. Beginning investors would be wise to stick to areas they know about, which will also make investing much less intimidating! Also consider what industries seem to be fairly stable and not subject to big fluctuations. This could include durable goods, food production, and telecommunications. I personally have investments in Johnson & Johnson, Verizon, AT&T, and similar companies that maintain a fairly stable performance. This allows me to make money off of dividends (more on this in a minute) and keep a stable side in my portfolio--if there is an economic downturn, people still need to have cell service & buy food/toiletries. If you aren't going to be taking a super active role in portfolio management (trading at least daily), you should consider the long-term implications of any stock you might buy.
2) Research what you know. Luckily for you, the modern investor, websites exist with information about virtually every stock! One I personally use often is Seeking Alpha, though this website contains some language that can be confusing at first. If you’re interested in a certain company, first Google and see if it is publicly traded.
I like Lululemon leggings, so I wonder if I can invest in that company. First, I search “Lululemon stock” to see if it is publicly traded. Looks like it is!
You can tab between the different time periods of the stock price. I’m a big fan of the 1 or 5 year view, so you can see if it has been generally trending upward or downward.
Next, I am going to search for articles talking about Lululemon’s stock. I enter their ticker (keyword on stock exchange), “LULU” and search for articles on Seeking Alpha. You can also just Google. Plenty of people spend their time writing analyses on stocks, so they aren’t hard to find.
According to a few perspectives, LULU hasn't been doing well, so maybe I shouldn’t buy it to start off. If I had decided I liked LULU, there would still be one more important thing to consider.
3) Does it pay a dividend? One of the best ways to make money with your money is buying dividend stocks. A dividend is something a company pays out (with frequency that varies individually) to investors a few times a year as a sort of way to return profits. If you pick a strong, dividend-paying company with a good business model, it will have a slowly increasing stock price over time while giving you money a few times a year! This is great!
To see if LULU paid a dividend, I simply googled "does LULU pay a dividend", and found this helpful chart on the NASDAQ (a large stock exchange) website.
As you can see on the chart, LULU hasn't paid a dividend in the last 3 years. This is strike number 2, and LULU is definitely out!
It is my stance that unless a company is the most amazing thing on earth, you shouldn’t buy its stock as a beginning investor unless it gives you a dividend. An average dividend is 2-3%, and while some companies go as high as 10%, they are often much more risky (which is why they are paying that much). Beware of super-high dividends; they are usually too good to be true. Partial exceptions to this rule include traded structures like REITs, MLPs, and BDCs, but these are a bit more complex (and risky) and will be discussed another time.
Besides these basic rules, you should generally just ask a lot of questions about any company you are interested in. Investing can seem confusing at first, as it is filled with lots of jargon, but is mainly a common sense exercise. By starting off investing in stable companies that pay dividends, you will have a hard time going wrong.
So, to summarize:
- Stick to what you know at first
- But, research about it and read expert opinions
- Get your money to make you money—make sure it pays a dividend!
You can read a list of some additional investing resources here. Do some Googlin' and you probably can't go wrong.²
¹ETF = Exchange-traded fund. Read my simple definition here.
²Just don't pay attention to anything said in Yahoo Answers.