Saturday, July 9, 2011

HOW TO INVEST IN STOCKS ? (2)

Think. Warren Buffet says that after you think, think again. Warren Buffet says that if he cannot fill out on a piece of paper several reasons to buy a stock, then he will not buy it.
Practice. Clearstation has a free "Paper trade" service where you can buy 40 different stocks and you try your hand at building a portfolio. The simplest method is to set a "stop" a dollar below the current purchase price so that you get rid of all the weeds (stocks that are dropping). You hold onto winners and you then get a portfolio of stocks that are trending up (you kept all the winners).
Open a stock brokerage account with a discount broker. No specific recommendation can be offered here, as the stock brokerage business is a rapidly changing field. Trial and error is probably the only way to find a good broker, but you should do your own due diligence by checking out their site and looking at reviews online. The most important factor to consider here is cost, i.e. how much commission is charged, and what other fees are involved? Discount brokers generally charge commissions of less than $10/trade, some as low as $1/trade, and some offer a limited number of free trades per year, provided you meet certain criteria. Other than costs, you should also consider whether dividend reinvestment is offered (which is the best way to build up your positions), what research tools are offered, customer service, etc.
Buy a small portfolio of stocks. Blue chip stocks are stocks of market leading companies known for quality, safety, and ability to generate profit in good times and bad, although they are generally fully priced and difficult to buy at a bargain price except in a severe bear market. Stay up to date with different value investing websites such as Motley Fool or Fallen Angel Stocks to see what kind of deals are out there. If you do not have the time or inclination to learn about individual stocks, buying and holding no-load, low expense index funds forever using a dollar cost averaging strategy is best and outperform most mutual funds. The index funds with the lowest expensive ratio and annual turnover are best. For investors with less than $100,000 to invest, index funds are usually best. If you have more than $100,000 to invest, however, individual stocks are generally preferable to mutual funds, because all funds charge fees proportional to the size of the asset. Even the lowest fee index fund, Vanguard Total Stock Market Index Fund (VTI), has a 0.07% annual expensive ratio. This amounts to only $70 over 10 years for a $10,000 portfolio, but $700 over 10 years for a $100,000 portfolio, and $7,000 over 10 years for a $1,000,000 portfolio. If the expense ratio were 1.50% (typical for an average mutual fund), the fees would amount to $15,000 for a $100,000 portfolio, and a whopping $150,000 over 10 years for a $1,000,000 portfolio.
Hold for the long term, at least 5-10 years, preferably forever. Avoid the temptation to sell when the market has a bad day or month or even year. On the other hand, avoid the temptation to take profit even if your stocks have gone up 50%, 100%, 200%, or more. As long as the fundamentals are still sound, do not sell. Just be sure to invest with money you don't need for five or more years. However, it does make sense to sell if the stock price appreciates too much above its value (see below), or if the fundamentals have drastically changed since purchase so that the company is unlikely to be profitable anymore.
Hold onto the winners and do not add to the losers without good reason. Peter Lynch said that if you have a garden and everyday you water the weeds and pick the flowers, that in one year you will have all weeds. Peter Lynch said that he was the best trader on Wall Street for 13 years because he picked the weeds and watered the flowers.
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