Monday, 18 January 2010

Stock Market for Dummies

If you’re new to the stock market I can appreciate the amount of information online can be totally overwhelming. I’ve been investing in the stock market for over 5 years now and when I think back to when I first started out I really didn’t have a clue what I was doing. I made the terrible mistake of jumping in too early before I really understood the market. I spent days in my local library pouring over investing guides and on various sites online trying to get a handle on what I was doing. I got so bored of doing this that I decided to jump in and finally buy some stocks. Big mistake!

At the time the economy was booming and houses were being built all over the place. As a result I bought stock in one of the biggest house builders in the country. I spent some time looking over their company results for the past few years and it all looked like a good investment. However over the past few years my stocks have plummeted in value. The economy is shrinking and so no one is looking to buy a new home. For those who are it’s become almost impossible to get a mortgage and so there are so many new homes left empty all over our great nation. The house builder’s stock getting money and so stop building homes. You can see where this is going right? So what’s the moral of the story? Don’t be a dummy in stock market! Make sure you keep your patience and don’t dive in too early or you’ll be sorry. An ill informed investment is just a gamble and I don’t know about you but I hate gambling with my money. Stock market for dummies is difficult enough without taking unnecessary risks.

I’ve gotten better at it over the years perhaps I’ve learned from my earlier mistakes. To be honest, if you make a mistake like this which looses you a large chunk of your free cash it’s not something you’re likely to do again. It’s perhaps the kick in the back side you need to give you a little bit of common sense. I always advise to go for the long term game with stocks. With that mindset you loose the fear of missing that next hot stock pick. You’re buying a stock that you’re going to hold for life and so you won’t dive in and buy it simply because it’s gone down a few points. You’re only buying it because you’ve done the necessary stock market research and know that it’s a good buy anyway. It’s not that it’s a few points cheaper than yesterday. I did that with the before mentioned housing stock. It looked like excellent value for money at the time but if I knew then what I know now I would have avoided it like the plague. That’s why I’m not ashamed to admit that I was a bit of a dummy in stock market. When you start out there’s a good chance you’ll make a few mistakes in some cases it’s the best way to learn. Just try not to loose too much money while you do it.

If you’re looking for a stock market broker here’s a tip to look out for. Some of them have started introducing a yearly fee for simply having an account with them. It’s ridiculous right? I certainly thought so when I got the bill in the post. They not only charge you per stock market transaction they’ll also charge you just for holding your stocks for you. Anyway I’ve decided to switch and ditch my current broker for purely this reason. I can get cheaper elsewhere so keep this in mind when you first setup your stock market broker account. Look to see if they have an annual charge for simply having account with them. This is slightly different for companies like Fidelity who you may have a mutual fund with or a tracker account. They apply a charge once a year to your investment for management purposes. They have never been sneaky about it like my broker and have always told me about the charges up front. You’d expect to pay this management fee for mutual funds anyway but it’s something to keep in mind if you’re going down that road.

I’ve always felt that there is a real lack of stock market education for beginners out there which is one of the reasons I started this site. If I can teach people how to buy stocks for beginners by telling them about the mistakes I’ve made in the past then great. The money is better in your pocket than being lost to the market.

I’m planning to write a whole post about the best stock market books for beginners later on. There’s a few out there and to be honest most of them are terrible. So if you buy the right book when you’re new to stocks and bonds then maybe I can save you a little bit more money here too. I can only recommend the ones I’ve read obviously some have become completely invaluable to the way I play the market. Some of them are truly terrible and are used for various other purposes around my home. It was absolutely not used to guide me in buying stocks for dummies. That’s the thing that can be quite hard to understand at first. All the so called gurus and authors of these books have they’re only methods for investing online and you can’t really mix and match especially if you don’t know what you’re doing. You might end up taking the worst points of two theories and mixing them together for some awful stock market investing technique. But hey at least you created something new! I’ve mentioned quite a few times on this site that I follow Warren Buffett’s value investing technique. I’ve been watching with great interest to see what happens with Kraft’s takeover bid for the UK Company Cadbury. Warren Buffetts investment company Berkshire Hathaway is a major shareholder in Kraft and so Warren Buffett could well be calling the shots for this takeover over bid. Cadbury have so far resisted the takeover but I’ve got a feeling that Warren will be back in there. I read that Kraft had talked about raising money from various different sources to which Buffett seemed opposed. Perhaps because buying things on credit is one of the main reasons that the economy is in such a state. In any case, I always watch with great interest when I see Buffett’s name mentioned in the media to see if there are tips I can pick up. The best stock market advice for beginners can be found from the great man himself through the Berkshire Hathaway website or from the various books he’s published. Value investing will of course be no use to you if you’re looking at penny stocks for dummies. Maybe this isn’t the site for you either!

Anyway the point of this post was to show you that it’s not usual to make mistakes in the stock market just try not to make them too costly or too frequent. Stocks for dummies is a massive subject and the best time to start working on it is…yesterday. The sooner the better. Each day you will pick up some new terminology that you didn’t know the day before. Each little piece you learn will let your brain hook on to more complex topics and it will become easier and easier to follow the terminology and get stuck in to reading those annual reports. To be honest it’s something that I still hate doing! It’s so dry buy I’m at the stage now where I can skim read various parts of it and look at certain figures and know how the company is doing. The various calculations you need to know to work out the value of a stock are in my head and so I can do the math fairly quickly. At the start you may find yourself pouring off these statistics and feeling like you’ll never be finished. Stick with it though, each one makes it easier and easier to read the next one. What we really need is some sort of classes offering stock market education for beginners. Perhaps we could ask Warren Buffett to setup a few classes to pass on his knowledge. The other way is of course to buy some ‘A’ stock in Berkshire Hathaway and then you can attend the shareholders meeting each year where you can ask the great man himself any questions you have. Purchasing stocks for dummies might be a little easier after that question and answer session.

So what can you expect from 2010? The answer to that is…who knows. Much of the stock market literature out there is about predicting which company is going to do well so you can buy the stocks cheap then sell them off when the pick up over the course of the financial year. The problem with that is that you have to look at the past to try to predict the future of a stock price. If you think about it though it doesn’t make any sense. The past can’t be used as a predictor for the future. You’ll often see this on the small print of the companies out there trying to sell you mutual funds. It’s basically a disclaimer for them saying “We can’t predict the future”! Oh and of course don’t come and complain to them if your stock disappears down a big black hole. Stock market advice for beginners is always tricky to give because no matter how careful you are there’s always a bit of a gambling element involved in the process. So the hot stock tips for 2010 should follow the same process you’ve followed for 2009 and 2008 etc. Stick to markets that you know and understand. Try to stick to companies who are leaders in their field (Coca Cola, Gillette). If this is all too much for you then try an all index tracker and save the same amount each month. That way you’ll get bargains when the market is cheap and maybe overpay when it’s not. In the long run it’ll even itself out. I know it’s not as sexy as buying stocks yourself. You don’t hear people at parties bragging about how they’re all index fund is doing do you? Time after time it’s proven to be one of the most successful ways to invest in the stock market. If you’re a cautious investor like me it’s the least risky way you can buy stocks online. You buy the whole market each month, if one company goes bust then you don’t feel it so much as if you had a 100 stocks in the company. The way I approach it is a bit of mix and match. I buy stocks separately and I also have the all index fund which buys the whole stock market. I am a cautious investor buy I still like to have a few stocks to brag about when I’m at the neighbors BBQ…

The way I look at the mutual fund which buys up the stock market is that it’s part of my retirement fund. It’s money which is almost guaranteed to provide me with a little profit and help my retirement be a little easier when the time comes. There’s been a few times when I’ve been tempted to dip in to the money because I’ve seen the latest hot stock tip online and decided that I have to take my safe money and go for a little bit more riskier investment. Thankfully common sense has prevailed in the end and I left the money alone. It makes sense to have two pots of money for this. Allocate a set amount say $50 a month for the all index fund and then whatever you’ve got spare to use on the stock market. That way they are kept as two separate entities and one doesn’t affect the other. You won’t find yourself tempted to dip in to the safe retirement money to fund your stocks. I’ve got it setup so that it comes straight out of my bank account each month and I don’t even notice it’s gone. I’m hoping in 30 years time when I retire there will be something there for me to notice, well I hope my eyes pop out of my head when I see it! Look out for my hot stocks for 2010 post coming soon.

1 comment:

  1. Hello,

    Great post thank you.

    I am a computer geek, to be mroe specific I'm a Graphic Designer & CSS Developer.

    I have been interested in starting a Stock Portfolio for a while and I just dont know how to start.

    Could you please give me some pointers as top which websites are good to but through. Also I dont even know how to but stocks, do you need to go through a Broker?

    I would really appreciate a reply. Please email me at

    All the best