You finally have a little extra money and you want to start saving for a car, a house, or start building your retirement fund. Unfortunately, there are way too many choices for your investment activities and many of them are so complex they are difficult to understand. High quality common stock, listed on a major exchange like the New York Stock Exchange, or part of a major index like the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 100 or 500 (S&P 100 or S&P 500) are good choices for a first-time investor.
Devote at least six months to learning about investing. Take classes, read books and articles, ask successful investors for advice, and then, go back and read some more. Knowledge is your best protection against the loss of your hard-earned money.
Establish an account with a major online brokerage firm that offers trading tools such as stock screeners that help you narrow your choices according to certain criteria, interactive charting that allows you to perform technical analysis on your selected stocks, company and industry news, and independent research reports. Learn how to use all these tools.
Control your greed impulse and cultivate a skeptical and realistic approach to selecting stocks for investment. It is tempting to hope for a huge profit on your investment, but reality favors losses on more than half of your trades.
Consult a reputable stockbroker or certified financial planner. These professionals can answer your questions and educate you on the process of building a stock portfolio that matches your risk tolerance.
Decide how much money you can afford to devote to building a stock portfolio. Do not use money that you anticipate needing in the foreseeable future because you don't want to be forced to sell your stock to raise money during a market correction because you may have losses in your positions.
- Dollar cost averaging is one of the best methods for building a stock portfolio. This strategy involves investing a fixed dollar amount at regular intervals so you limit the risk of investing all your money at a high market price and increase your chances of buying some stock at market lows.
- Beware of hot stocks and avoid listening to stock tips and emailed hot stock spam. Many of these stocks are part of what is referred to as "pump-and-dump" promotions, which are intended to attract gullible investors so the traders can sell out at profits. Vigilant skepticism is always wise.
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