So you are looking to get into the stock market and not sure where to start.  You are not alone my friend.  The market has bounced back up between 40% to 70% since the March 2009 lows depending on which market index you follow, and here you are sitting on the sidelines wondering how you can get a piece of this action.  It’s hard NOT to be excited.

For all you newbies looking to get in or wanting to learn about how the market actually works, over the next couple of weeks I will slowly introduce many of the basics to stock market investing.  You don’t need to develop a trader mentality, but you DO need to develop an investor mentality.

The best way to start investing is NOT by jumping in head first and putting down $2000 on some random company that you hope to appreciate over time.  That’s the way I started in high school.  It hurt.  With ill-preparation, I was not able to control my emotions, I did not understand the financial tools available to me, I was inundated with simple financial information, and I lacked the decision making skills when it counted the most.  It’s my goal to prepare you the right way so you don’t relive my experience.

Many people come up to me and ask me how they can start investing.  Each and every time I reiterate the same info that I’m about to provide to you below.  In my opinion, it’s simply the best transitional process to begin stock market investing without having to LOSE LOTS in order to LEARN.

Learn by Osmosis.  If you are new to the stock market, economics, or accounting, start by surrounding yourself in the world of finance.  Whenever you have the chance, tune into CNBC or Bloomberg and have it on in the background.  Set your homepage on your internet browser to Yahoo Finance.   You don’t have to dive into the material and scour through all the information but read anything and everything that interests you.  Pick up a Barron’s magazine, Wall Street Journal newspaper, or even an Investor Business Daily and read it while you’re on community transit, at the gym, or on the toilet.    With time, you’ll begin to pick up on what’s going on.  It could take as little as two weeks to two months.  It doesn’t matter how long it takes you, just submerge yourself.  Soon you’ll understand the markets current sentiment, which industries are blazing (and the ones that are not), you’ll learn about earnings cycles, and how government / FED decisions influence trading activity.

Read About It.  I suggest you read a bare minimum of two books before you start investing.

1) Read an informational / reference book on stock investing like Stock Investing For Dummies.

2) Read a book about someone that has succeeded in the stock market.  Maybe pick up a book by Peter Lynch, the successful mutual fund manager, like One Up On Wall Street : How To Use What You Already Know To Make Money In The Market or even one by Jim Cramer, CNBC personality, like Jim Cramer’s Getting Back to Even.  Jim Cramer is crazy, but when you’re new to investing, you can learn a lot from his ability to articulate his reasoning.  Even if you do not agree with him, you have to applaud his enthusiasm.  The book The Intelligent Investor: The Definitive Book on Value Investing is a classic worth looking at as well.

Paper Trade It. Give yourself some time to paper trade.  Paper trading is basically the act of simulating actual stock market trading without the usage of real money.  I suggest using some type of database software like Excel to track your positions over time.  Be true to yourself and make decisions that you would actually make if it were your real portfolio you were dealing with.  For example, if you have set aside $5000 for investing, then don’t virtually buy 400 shares of Google (ticker: GOOG) which will run you roughly $200,000. Obviously you can start off with unlimited capital and invest any way that you want while paper trading, but it simply takes away from the realism of the experience (even though it’s fake money from the start).

Create Your Portfolio.  Now that you fulfilled the prerequisites above, it’s time to actually open an account and get your hands dirty.  Paper trading is great, but to be honest, it lacks one major hurdle, the ability to control your EMOTIONS.  The psychological aspect to trading is intoxicating and can cause you to make poor decisions.  The best way to combat this is by starting small.  Take a $1000 of your portfolio and try out your investment strategy by scaling down your purchases.

Be a Student for Life.  It’s never smart to be complacent.  Continue learning and expanding your skills.  Find out what type of investor you are: Fundamentalist, Chartist, Quant, or Hybrid.  Learn different types of investing from the foregin exchange market to the options market.

Stay Away from Stock Forums.  Stock forums are fine when you are able to disseminate the crap from the good stuff.  However for new investors, stock forums are like back alley’s full of crooks trying to sell you bad information.  Stock forums are full of two types of characters: Pumpers and Bashers.

Pumpers are people that have cheerleading-like tactics that sucker newbie investors into investing into whatever they are touting.  Often their information is bias and optimistically skewed.  The more obvious pumpers have messages like this, “THIS STOCK IS GOING TO THE MOOOOOOOOOOON!”

Bashers are forum trolls that talk down a company because 1) they are short (betting against a price increase), 2) have been burned by the company, or 3) have nothing better to do.  Criticism and taking opposite sides of the trade is fine just as long as it is founded and there is evidence to back up the claims.    Obvious bashers look like this, “THIS STOCK IS A PIG! EOM”.

Used with caution, stock forums may be valuable, but for now stay away from them.

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In conclusion, this is my recommendation on how to get started.  You hear everywhere that the best learning process is experience itself.  I agree.  However, preparation is just as important to decrease that learning curve.  The longer your learning curve, the more money you’ll likely lose.  So let’s mitigate that by adequately preparing yourself before the real deal.

Do you manage your own stock portfolio?  How did you start?  You have any other tips to newbie investors looking to jump into the market?

Until next time,

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