WELLNESS & WELL-BEING
Learning to Invest in Stocks
By Donald Broughton
The best way to learn how to invest in stocks is to get started , then buy stock in companies that can sell more at higher prices . In many of the previous articles written for this column , we have focused on a holistic view on how to create wealth with a few tactical tips . We ’ ve received some feedback , especially from those who are investment professionals . Their advice has essentially been , “ Enough with the philosophical platitudes . Give us more practical tips on how to create wealth .”
So here goes : How do you learn to invest in stocks ? It is relatively straightforward . You learn by investing in stocks .
First , we have to make a legal disclaimer . This is not a solicitation . If you do something I suggested and it doesn ’ t work out , I am not responsible . Investing in stocks involves risk , and you could lose all your money . All right , now let ’ s talk about one of my favorite topics .
How do you get started investing in stocks ? You start . Most brokers will require a minimum to open an account of at least $ 500 . Once you ’ ve opened an account , it makes sense to set up a small amount to be automatically taken from your paycheck every pay period , and deposited into your brokerage account . Make it an amount that won ’ t make it impossible for you to pay your bills , and vow to yourself to not take any money from the brokerage account for the first three years .
Are you about to get a raise at work ? Often , a great way to get your account jump-started is to designate the amount of a raise as an ongoing contribution . If you were already getting by on a certain level of pay , you can continue to get by on that amount , and the incremental amount can be used to fund your brokerage account .
So , you have some funds in the account and are adding to it regularly . Now , to invest those funds . There are plenty of arguments for passively investing in index funds . The ongoing fees are low , and they will appreciate in line with both the rise and the fall of markets . Over the long haul , this is a perfectly fine way to invest , but there are real advantages to investing in individual stocks . Namely , you can significantly outperform on the way up , and more important , you don ’ t have to fully participate on the way down .
Some of the best investors I know don ’ t outperform on the way up , but they don ’ t fully participate on the way down . That is arguably more important to your long-term performance and achievable by investing in individual stocks . How is that possible ? Simple : If a company has a better product or service than the competition , it may be able to charge more for it , grow the amount it makes on every dollar of sales , and grow the amount it sells - faster than the competition . When you find companies such as this , they tend to go up more than the rest of the market when the market is rising , and go down less than the rest of the market when the market is falling . How do you find such companies ? It is easier than most people realize . Look at what you are spending your money on . What do you or your peers love to buy , consume or do ? Find the business that you look at and think , “ That ’ s a great business ! I wish I owned it .” If that business has publicly traded stock , you can own it .
It ’ s just like one of my favorite clients told me years ago , “ I ’ m looking for companies that can sell more stuff at higher prices .” That is how you get started . Next month , we will talk about how you should value , or what you should pay for stocks in these kinds of companies . Stay tuned .
As founder and managing partner of Broughton Capital , Broughton is a frequent guest on CNBC , “ Nightly Business Report ” and Fox . He is regularly quoted in The Wall Street Journal , where he is also recognized as a top stock picker , as he is by Fortune , Zacks and StarMine .
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