Sunday, November 21, 2010

Buying Stocks For The First Time


If you are intimidated about buying stocks for the first time, you are not alone. A lot of people are intimidated by the stock market and are just not really sure where to begin. Most of the research I've read online spends a great deal of time teaching the beginner how to set up a brokerage account, how to fund it and execute a trade. But, the real trick to being successful at investing starts with some basic fundamentals that begin before you invest a dime of real money.

The first thing that I suggest is that you pick a strategy. Aimlessly buying stocks based on tips from friends, watching Cramer's Mad Money will probably frustrate you because you are basically investing without a plan in mind. The nature of the stock market is that it punishes those who don't study it and learn from their mistakes. Don't let this be you. When it comes to stock market investing strategies, there are three basic ones. They are growth, value and income investing. I'd also throw momentum investing in there as well, but I myself consider that a form of growth investing. Of these types of strategies, I prefer growth and upon doing my research to find a suitable strategy have adopted the CANSLIM approach developed by William O'Neil. Do some research and find an investing technique that you like. Once you've done that, put the blinders on and don't look back. Start your process to master it.

Let me walk you through the steps I took before I bought my first stock. The first thing I did was read everything about I could about my strategy and wrote down the steps I would need to take on daily basis to implement it. I worked on one step at a time. For example, one of the first things I needed to do was determine the direction of the stock market. My investing strategy calls for me to only invest in a market that is an uptrend. I spent several months working on understanding how to watch the market indexes before I did anything else.

After that, I needed to start screening for stocks that met my criteria. There are thousands of stocks to choose from and your goal is to narrow down the number of stocks that you need to look at on a daily basis. You do that with a stock screen that helps you find the stocks that meet what you are looking for.

Once I narrowed that down, my next step was to start looking at charts to see the best buy points for the stocks on my watch list. This is proving to be the most challenging areas of CANSLIM. To gain the experience that I needed, I started using a stock simulator to learn the mechanics of how to buy stocks. I then would watch the performance of these stocks to see if I needed to sell them because they had dropped in value or because they had reached a predetermined profit target.

Even with a simulator, this is not an easy task. I know that I had a stock recently that went up 29% and instead of selling it, I watched the gain evaporate. I did sell it at a 10 percent gain but I learned from my mistake and will sell a stock like that the next time I see that situation.

Once you've streamlined your process and started gaining experience practicing, the next step is to do the same thing with real cash. It's at this point, I'd open up a brokerage account. Personally, I use TD Ameritrade. Keep in mind that it will take a few days to get it funded.

So there's what I would do if I were buying stocks for the first time. Pick a strategy, start practicing, make some mistakes and then repeat the process with real money. Good luck on your stock market investing program.

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