Buying Individual Stocks

I’m looking into investing in stocks for the first time. I have heard that money market mutual funds are a good and reliable choice, however I would like to invest in something that has a greater earning potential. I understand that this kind of investing is a little more risky, but I don’t mind taking that risk if I have read up on the company and truly see growth potential. How can I find information on what kind of stocks would be good? – Katie, Maplewood, MN

Katie,
You are right in that stocks have the potential for greater gains than money market funds. One thing that you need to realize before investing in individual stocks is that they also carry a lot of risk. Most investment advisers urge their clients to invest in mutual funds for the diversification they offer. You said that you do not mind investing in a company where you see growth potential, but you need to keep in mind that the stock market might have already factored this growth into the stock price.

The first thing I would do is to visit your local public library and read everything you can get your hands on regarding investing. If you want to be successful, the first thing you will need to learn is how to interpret financial statements. These are the publications released by every publicly traded company on either a quarterly (10-Q) or annual (10-K) basis. They contain the relevant financial data that illustrates how the company performed for the given quarter or year. A word of warning: financial statements are very difficult for a beginner to understand. Make sure you read the footnotes of an annual report before even thinking of investing your money. Footnotes are where the company’s management likes to hide the bad news.

If you are determined to try your hand at picking individual stocks, I would certainly recommend reading The Intelligent Investor by Benjamin Graham. If you are unfamiliar with the author, he was Warren Buffett’s mentor and his professor at Columbia. The book is a difficult read, but it gives insight into how to select stocks using a “value” approach. Another great book to read is Common Stocks and Uncommon Profits by Philip Fisher. Warren Buffett has said that this book influenced his stock selection process, as it emphasized that buying a great business at a fair price as opposed to a lousy business at a great price.

Once you have developed your own criteria for purchasing stocks, you will need to keep up with current events in the stock market. I have found that the best place to find up to date information is in the Wall Street Journal. The online version of their website posts Wall Street’s breaking news. If you plan to invest in individual stocks you should also be reading industry trade magazines and newsletters to get a better feel for the business you are investing in.

While I have just given you some references that will serve as a starting point, I would like to warn you that successfully picking individual stocks takes a lot of effort. Most people, including the professionals, fail to beat the market average. Keep that fact in mind before investing a penny in an individual stock. Good luck!

Matt / Google+

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