Investment Education: How to invest in stocks.

Jul 24, 2014 Investment Education: How to invest in stocks.

As the author of “Why Stocks Go Up and Down” and teacher of the introductory investments course for the Boston Security Analysts Society for over 20 years, I am repeatedly asked, “How do I invest in stocks?”, or more precisely, “What do I need to do and know to invest in stocks?” The first part is easy. Get on the internet and open an account with Ameritrade, Scottrade, Fidelity, or any one of the other reputable online firms. Some firms have a minimum requirement of perhaps $500 or $2000 to open an account. If you don’t have this much, you probably should not be investing anyway. The mechanics of opening an account and placing an order to buy some shares of stock are easy, and in any case the brokerage firms’ telephone customer support people will be happy to walk you through it. With costs of under $10 per trade at many online firms, this cost should not be a big consideration unless you are a very active trader. The second question, “What do I need to know?” to invest in stocks, is more difficult. Here is how I answer that question for new investors.

Investing in stocks is like many other endeavors in life. The more knowledge and experience you have, the better your results are likely to be. So my advice is: read, read, read, and invest, invest, invest. That answer is correct, but by itself, not very helpful. So let’s dig in. In this and subsequent posts, I will make suggestions of what to read. This reading list will include: 1) “big picture” reading – what is going on in the USA and world in the economic and political realms, that might affect stock prices in general, and your investments in particular, 2) industry reading – almost any company you are considering investing in has opportunities and constraints associated with the industry it serves, whether that is healthcare, airlines, technology, or whatever. Example: as the economy recovers, more people are flying, both for business and pleasure. This is good for airlines, but competitive forces such as seat pricing, or constraints such as available gate spaces at important airports, can limit airlines growth and profitability, and therefore stock prices. Industry reading will help you spot these trends. Finally, 3) company specific reading.
Here, I will discuss big-picture reading. I suggest reading either the Wall Street Journal or Investor’s Business Daily every day. I read the print versions but I would guess the online versions are essentially the same. No, you do not have to read the entire newspaper. Here is what I recommend: For the WSJ, read the “What’s News” column on the left side of Page 1. Then turn every page in the newspaper and read just the headlines and sub headlines. Later, you can go back and read a few articles of interest. Be sure the “of interest” includes some articles on the domestic and foreign economies, industries in which you own stocks, an occasional article about credit markets (interest rates and bonds), and commodities, especially oil, gold and copper. Don’t get too caught up in gold, as important as it is, it can become a distraction. By reading the WSJ this way every day, and watching stock market performance, you will develop a feel for how politics, government economic policies, business trends, some social trends, technology, health care, and other factors play into the world economy, and therefore how all of these impact stock prices.
Have you seen the advertisements by mutual fund company T. Rowe Price that show seeming unrelated events from around the world and then tell you that their analysts know how to make the connections between them? There is great wisdom in that ad. Good investment judgment requires understanding well beyond the most recent company earnings report. I have seen young analysts do better analysis and make better recommendations when they begin to understand the companies they follow in the context of the big picture.
While the WSJ is aimed at both investors and the business community, Investor’s Business Daily (IBD) is aimed primarily at investors. If you choose IBD, I suggest you read most of the front page, and most or all of the next page (A2). Page A2, called “To The Point,” is just that. It summarizes many investment related “should know” factors that, taken together give you a good understanding of the investment landscape. Many of the items on this page are about just one company’s earnings report for one quarter, and may not seem big-picture relevant. But those companies are often bellweathers of trends impacting other companies or economic sectors. Viewing these individual data points together, reveals important trends. IBD readers should also look at the second section (B). In particular, read “The Big Picture” and look at the market charts. Also in the B section, look periodically at the commodity charts. If lumber prices are moving up or down, it may tell you something about the home building market. Of course it could also be reacting to lumber demand for export to foreign countries. Remember that no indicator is always right, and assume that no indicator is by itself predictive. A rise in the price of lumber may be good for homebuilder stocks (and therefore home furnishings company stocks) on one occasion, but be a negative indicator for those stocks in a different set of circumstances.
If you do nothing more than read the WSJ or IBD regularly, as suggested, I think you will be pleasantly surprised at how much more sophisticated you views and investment judgments will be. And a fringe benefit: you will be able to talk circles around your friends in investment/economic/political discussions!