How to Start Investing in Stocks: Three Short Lessons for Beginning Investors

Novice investors have a lot of questions – namely, how to start investing in stocks. Also, what are some good investments? How do I know which companies to invest in?

These are all good questions, and I’ll help you to find the answers. But first, I’d like to offer my congratulations. You’ve taken the first step by deciding to learn how to start investing, and you should feel good about that. This will give you a feeling of being in control, which, in any aspect of your life, can bring great psychological benefits.

In addition, being in control of your investments can bring great financial rewards. But first things first. You don’t just step up to the plate and start hitting home runs. It doesn’t happen in baseball and it doesn’t happen in investing.

First you’ve got to pay your dues. That means learning how the stock market works. I mean, how it really works, not how some pundit tells you it works. My job is to help you learn this as quickly and painlessly as possible, to accelerate the learning phase so you can start making money (and learn how to consistently make money) as fast as possible.

To start, I’m going to give you three short lessons on how to start investing in stocks. Then I’ll tell you how you can keep learning, with minimal cost and minimal pain.

Lesson 1: Have an exit plan for every stock you buy. In a perfect world, every stock you buy would just go up and up and up. But our world is far from perfect. So before you buy a stock you need to plan what you’ll do if it goes down. Will you sell quickly, keeping your loss small? If so, how quickly? After a 10% decline? 15%? 25%? Or, will you hold on, confident that the stock will rebound in time? Both of these approaches can work, but, for each individual stock, one approach is better than the other. You’ve got to know ahead of time which one is right.

Lesson 2: Invest in the future, not the past. Professional investors employ a staff of analysts who spend their days predicting what individual companies will do in the quarters and years ahead. They’re often wrong, but at least they’re trying. And since they are always looking forward, they are able to detect trends and take advantage of them. Don’t base your investment decisions on the products a company has already brought to market. Look at products they have in planning or development, and invest (or don’t) in those.

Lesson 3: Learn more. This rule applies to every aspect of our lives, but especially to investing, where every day brings new developments. Reading Wall Street’s Best Daily is a great first step.

And one final suggestion. If you’re looking for advice on the best stocks to buy, consider our entry-level investment advisory, Cabot Stock of the Week, or one of our other advisories. After all, the best way to learn how to start investing is to do just that—start investing.

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