abrogator nosedive: How To Get Started Investing in Stocks and Bonds

Tuesday, January 22, 2013

How To Get Started Investing in Stocks and Bonds | WmilesN

Kudos to you and welcome to the world of securities trading! There?s a ton to learn, but it?s worth it. Here?s how to get started based on my experience as a registered financial securities representative and a decade of profitable (and fun!) investing:

Read a well written broad overview about markets and money

The Wall Street Journal Guide to Understanding Money and Investing: Kenneth M. Morris, Virginia B. Morris: 9780684869025

Dig deeper into specifics about equities

Bulls Make Money, Bears Make Money, Pigs Get Slaughtered: Wall Street Truisms that Stand the Test of Time: Anthony M. Gallea: 9780735201453

Learn the truth about how markets work in the long run

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition): Burton G. Malkiel: 9780393340747

Put investments in context of the macro economy

Living Yield Curve ? Charting Interest Rates

Set realistic return expectations

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Understand Uncle Sam?s role in the market

Investing Tax Tips | Taxes on Investments

Learn how emotions play a large part in investing

How Thinking Costs You

Note: I would not recommend diving into Graham?s Intelligent Investor, which some may suggest, as it involves a level of corporate knowledge that can be daunting to put into practice (additionally, there aren?t that many companies that qualify for his advice anymore, especially in technology?the market is too efficient these days).

Once you feel comfortable with the basic concepts around equity (stocks), Scottrade Online Trading is a solid, inexpensive choice for beginning to invest. For additional information, Yahoo! Finance is generally known as having the best information, although Google Finance has better charts. In terms of picking which stocks to buy, I?d start with companies you?re familiar with?but make sure they?re trading at a good price using the concepts from the articles above.

After you set up an account, you?ll quickly learn some form of the following, as I did:
Making successful trades is difficult until you have over a few thousand dollars to invest. Most stocks you?re likely to trade simply don?t move fast enough to overcome the initial trading fees. For example, if you buy 2 shares of McDonalds at $90 with a $14 total fee ($7 to buy, $7 to sell) and the stock goes up 10% next year (about average for equities), you?ll only make a profit of $4, or 2%. Even worse, that $4 is taxed by the federal government. Bonds are even slower, and in most ?safe? cases less profitable or not even available without $5-10k to invest (unless you go down the mutual fund route, but it doesn?t sound like you want to take a passive role).

It?s difficult to find a truly great buying opportunity that hasn?t been discovered. Great stocks are expensive because they?re great stocks. There aren?t any free lunches out there. In most cases, when you make great gains it?s because you believed something that other people did not?and you were right. This is very difficult with all the news media and hysterics around the market.

Buying and selling stocks is an emotional process. It may seem like a rational, calculated, decision, but when your stocks go down you will feel pain. And in many cases that pain will lead to irrational decisions. The same is true when your stocks rise and you don?t reap benefits in a timely fashion.

The market doesn?t seem to be based on the fundamentals you?ve spent so long reading about ? in many cases it seems prone to crowd herding and random shocks.

But don?t worry! It gets better:
Once you?ve made a few investments, learn about options Options. If you?re right, you?ll make ~5x the return over plain equity (however, you also loose ~5x as much when the stock goes down). For small investments, it is really the best option to ?get some skin in the game?.

As you follow the markets you?ll start to get hunches about market activities that aren?t rational and present an opportunity. For example, the market over-reacted, the news just doesn?t make sense, people are trading on too short of a time horizon?and it will lead to ?plays?, that is to say a well informed hypothesis that is contrary to many and has the potential to really move the stock.

You?ll develop a system to ease the emotional aspect of investing. In my case, I wait 3 days before buying or selling anything and have well defined Limits/Stops that automatically perform the trades I might not be capable of doing emotionally. In most cases the answer is extremely clear on whether you should take the contemplated action after this period, and it?s usually far too risky to make bets on opportunities that will be gone within a few days. Many of my worse potential investment choices have been avoided this way, since the markets have a tendency to irrationally enable a false sense of immediacy.

The market is a balance of humanity and economics. It ebbs and flows with time, and you?ll soon start to see the big picture. Fundamentals matter, but so do the charts. News matters, but also how the world is ?feeling? at the moment. It?s through an understanding of these factors that you begin to make the best investments.