Friday, April 11, 2008

How A Beginner Can Learn About The Stock Market

Okay, as of right now, you know next to nothing about the stock market. Zip. Zilch. Nada. You don't know Warren Buffett from the Home Town Buffet.

But you're interested. You'd like to know.

Well, here's my simple, six step plan to go from knowing nothing about stocks to knowing enough to feel comfortable buying a couple.

Notice I didn't say how a beginner can make HUGE money off the stock market or BECOME A MILLIONAIRE off the stock market. The stock market is not so simple that all those late night infomercial programs can make you a bazillionaire. If it was, day trading wouldn't be so hard.

It's just about how to get from where you're at now to where you can buy a couple of stocks and feel confident that you're not throwing your money away. Think of it as a way to do a home study course in the stock market and only having to buy books.

So alright--here we go.

Step 1: Register with an Online Stock Exchange game.

Yes, right now. Before you know anything. Go sign up for an online stock exchange game, set up a "Portfolio" (that's just a collection of the stocks you're going to buy) and buy a couple hundred shares of your favorite companies.

Whatever you like, you can probably buy it. Whether you like coffee and muffins (Starbucks goes by SBUX and Sarah Lee goes by SLE), fancy cars, (Mercedes Benz trades under Daimler AG, as DAI) or comic books and wrestling (Marvel Comics is MVL and World Wrestling Entertainment is, believe it or not, WWE), you can probably buy a bunch of pretend shares of it, or whatever company owns it.

I suggest the Virtual Stock Exchange. It lets you start with $100,000 in play money, and then see what the money does over time. It even lets you do stuff like buy to cover and sell short, which you don't understand now, but you'll want to be able to play around with in the virtual world before you do it for real.

But don't worry about any of that. Just set up an account, and buy, say, 250 shares of 3-5 things that are interesting to you.

See how easy that was? In truth, buying stock is just that easy. Even if you were really buying stock, it would basically be just like whatever you did. You register with somebody, you tell them how many shares to buy, and then you buy them. Like ordering off Amazon.

The hard part is making money at it. So in the next step, you're going to see how you did.

Step 2: Add your online stock game to your homepage tabs.

This is so you can look at it every day. If you started out with $100,000, like on the virtual stock exchange, watch as your money goes up and down. You're going to see that some stocks make you money, and some stocks lose you money.

By just watching some stocks for a couple of days, you'll probably see some of them go up and make you money, and some of them go down and lose you money. That's all you're trying to do at this point, is see how stock prices work.

One of my brothers made this comparison: The price of stocks are kind of like the price of gas. They can go up or down on any given day. By looking at some stocks for a while, you'll start to get an idea of what's a good price and what's a bad price. You know how you can tell when you see a really good price for gas, and you stop right then and grab it? Same thing.

Of course, after you've done this for a while, you'll start to wonder about what all the other numbers and terms and things mean. Or, you'll see one stock doing really, really well and wonder if you should buy it for real. That's when you'll want to go on to . . .

Step 3: Start Reading About Stocks

Yup. Can't get out of reading. But you're reading around on different blogs on the internet, right, so you can't be one of those anti-reading folks.

Of course, reading blogs is different than reading books. Books are often written by stuffed shirts who want to sound smart, not people who want to make stuff easy to understand. So finding the right books can be hard.

Here are some I reccommend:

These are all geared at people who are new to investing, but you should probably start with one of the Motley Fool books if you're feeling ready to dive in or the book "For Dummies" if you're feeling like a dummy. The Peter Lynch books are more about how to pick stocks, while the others have the basics of what they are and what all the numbers mean.

They're all well written books. All of them are written with regular people in mind.

Of course, while you're reading, you'll also want to . . .

Step 4: Try out what you're reading.

When you come across a suggestion or information, you can try it on your online stock games with your play money. When Peter Lynch says go to the mall and see which stores are crowded, you can really go to the mall, really see which stores are crowded, and then come home and buy stocks on your online game, safe in the knowledge that it's all just pretend.

Trust me, it'll be fun.

Step 5: Do this for a while.

One of the things you're going to find out as you start reading your books is that day trading is insane. If you think you can make big money on the stock market by guessing what stock is going to go up a bunch by Teusday (or, even worse, by two o'clock today), then turn those late night infomercials back on and have a good time. The rest of us have jobs during the day and we can't sit around sweating about whether we're going to miss the chance to hit that mark we were going for when it hits for 15 minutes in the afternoon.

Instead, where you're going to make your money is by buying companies that are doing well, and then keeping hold of them while they're doing well. This means you might not know for a while whether the strategies are paying off.

Now seriously, you don't want to play this game for 10 years just to see if your long-term strategies are paying off--those are 10 years your real money could have been making more real money in the market. So how long is good?

The answer depends on you. I'd suggest no less than three months and no more than a year. Three months represents a full quarter of a fiscal year, and you should have a chance to see a bunch of things happen to your stocks, including the effects of your company's quarterly reports. But of course, that depends on how confident you're feeling with where you're at--basically, repeat this until you have a couple of stocks you feel ready to go in on for real.

But don't wait too long--the stocks that you've decided are good probably aren't going to get that much cheaper if you wait.

ShareBuilder - Welcome page Step 6: Buy some stocks.

Yeah, I know. You don't feel completely ready. Well, go ahead and dive in. Find a good online discount broker and make your first purchases.

I suggest you go with ShareBuilder. Not only do they offer cheap trades, but also offer something similar to "Drip." What this means is you don't have to have the full price of a stock in order to buy a share.

Most brokers simply sell you a number of shares. If a stock is selling for $360 a share, to buy a share you'd have to have $360. To buy, you'd have to buy in multiples of $360.

What Sharebuilder lets you do is buy shares based on the dollar amount, rather than on the number of shares.

Let's say stock X is trading for $40. If I had $100 to invest, most brokers would say, "I can get you two shares," and give you $20 change. With Sharebuilder, I can say, "Buy $100 of Stock X," and they'll just give me credit for 2.5 shares.

If I tell them to take $100 a month to buy stock X, I can also take advantage of Dollar Cost Averaging as my $100 goes in each month. (What's that? Nope, I'm not going to help you on that one. You got to read the books.)

There you have it!

Six steps to go from greenie to novice.

You don't have to follow these steps, of course. You could just go straight to sharebuilder and start buying up the companies you dig, literally going from average joe to stock market mogul in an afternoon.

But I think you'll find that with a little preparation, you can not only walk through those big golden doors of stock ownership feeling confident, but like the twin bouncers of Bull and Bear aren't going to kick you out on your kiester.

Follow these steps, and a few months from now, when your friends are complaining about their holiday credit card bills, you can ask them to fill out those checks carefully, because just a bit of it goes to you (Visa trades simply as V).