How to invest: How to Invest in Stocks for the Beginner

Investing in stocks can be scary for a beginner. It doesn't have to be. There is a wealth of good information available and the process can be simple and straight forward. Follow these simple steps and you will be investing with confidence.

1. Calculate how much you can afford to invest. If you have a large amount of debt in anything other than the mortgage on your primary residence you should consider paying it off first. It doesn't make much sense to pay more in interest than you can make on an investment. Whatever you decide to invest should be money that you wont need for a while. Do not tie up cash that you need to spend anytime soon.
2. Figure out your time horizon. Will you need this investment money in a year? How about 5 years or 10 years or 30 years? The type of investment you choose for retirement will differ from an investment intended to provide a down payment on a house in a few years. You may decide to put a little in each. The three pile system works well for many. You can invest some for the short term, some for the medium term and some for the long term.
3. Decide your risk tolerance. Are you willing to endure the ups and downs of an unpredictable market or is it more important to preserve your original investment? In general the riskier investments will perform better over time but fluctuate more. Conservative investments grow slower but have a lower risk of taking a nose dive. It's a good idea to put money you will need sooner in conservative investments while saving the riskier investments for long term money.
4. Consider whether you want to take a hands on or hands off approach to your investing. Are you the type of person who wants to trade individual stocks or would you prefer someone else to pick them while you set general policy? Would you like to watch your stocks on a daily basis or invest your money and forget about it until you need the cash? It's up to you.
5. Choose a hands off approach and you are probably better suited for mutual fund investing. Mutual funds are made up of stocks, bonds and cash. The mixture and types of stocks vary from fund to fund. You can select the investment theme and let the fund managers do the rest. You can also invest in index funds that mimic the market as a whole. Index funds have lower fees so are a popular way to invest. You can also deal with a full service broker who will pick investments for you based on your needs. This will involve much higher fees since your broker is paid out of your investments.
6. Choose a hands on approach and you are probably better suited for on line trading. There are many internet companies like E*Trade and TDAmeritrade that let you buy and sell individual stocks as often as you like. They also buy and sell mutual funds. There are fees for all transactions but they tend to be low through internet brokers. All this can also be done through a full service broker if you are willing to pay higher fees.
7. Remember your chosen balance of short term, medium term and long term investments. Every year or so you should take a hard look at your portfolio and determine whether it is still true to your investing plan. Financial needs change, time horizons change and investments change. Determine whether you need to adjust your plan so that it is still working for you.

Tips & Warnings

Financial markets are notoriously unstable. It is important to come up with a sound financial plan and stick to it. If you panic every time the market dips then you will always sell at a loss. Likewise, if you ignore warning signs of a bad time in a particular investment you may have to wait a long time before recouping your losses. Ride out the long term ups and down and you will do fine in the long run.

All investments involve risk. The greater the risk the greater the opportunity for reward but also the more likely you will lose money. Consider all risks, fees and consequences before investing any money. Be sure to read up on a stock before risking your money. New investors are prime targets for scam artists. Be wary of anyone who approaches you to invest. If their offer sounds too good to be true it probably is.