Stock Investment Tips for Beginners

Everyone has to start somewhere. That old maxim certainly applies to investing or trading in stocks. Do you consider yourself a stock market newcomer? Here's one way to think about stocks for beginners: Don't think of yourself as a beginner at all.

That's because when learning how to trade stocks, you may be your own best research director, money manager, and market expert. Is "now" the time to start trading stocks? Regardless of what the market is doing, it's always a good time to educate yourself about how the stock market works and where potential investing or trading opportunities may exist.

But first, trading education coaches advise you to "hit the books and study up." Here are five pointers for anyone wondering how to get into stocks.

Consider Warren Buffett's advice: "Never invest in a business you cannot understand." Think about the companies that provide the products and services you, your family, and your friends use frequently or daily. 

How did you get to work? Where have you dined out recently? What sort of entertainment did you watch or listen to over the weekend? Asking basic questions is a good way to start constructing your investing or trading thesis. 

Companies and brands that are visible or ubiquitous at ground level are there for a reason: They're probably well known to the stock market too. Investing in them could offer an opportunity to make money off them and share some of the other benefits, such as dividends.

Of course, there's no way to know if company profits will continue in the future, and companies can stop paying dividends at any time.

Buying shares of a stock confers partial ownership of a corporation and potentially a slice of the company's earnings. That's one reason it's important for market beginners to wrap their heads around fundamental metrics such as revenue and basic earnings per share (EPS), which is a rough measurement of the amount of a company's profit that can be allocated to one share of its stock.

Publicly traded companies typically report earnings and other financial information including EPS every quarter. So, for any stock you're considering, it's a good idea to check the company's recent earnings history and compare that to analyst expectations. Does the company have a track record of beating or falling short of EPS forecasts? Also, check the calendar to see when the company reports quarterly results next.

Earnings conference calls, which are usually held shortly after a company reports quarterly results, offer another valuable source of fly-on-the-wall insight and perspective. By listening in, you can gain insight into what the CEO is thinking and what questions analysts and investors are asking the company's leadership. 

Listening in could also give you a better feel as an "investor," rather than someone who's just purchasing stock shares.

Many market professionals use chart patterns, trading volume statistics, and other technical indicators to help them make buying and selling decisions. These professionals may be studying "momentum" readings—how quickly or slowly a price is moving up or down—or trying to spot early developing price trends, or trends that may be about to reverse. Remember this timeworn market mantra: "The trend is your friend."

Stock market beginners can apply similar practices to see what direction a stock has been moving and where it might be going. One handy tool to help identify trends combines the 30-day simple moving average (a stock's average closing price over the past 30 days) with the 10-day exponential moving average (which assigns greater weighting to more recent data).

If, for example, a stock is above both its 30-day simple moving average and its 10-day exponential moving average, technical traders typically consider this a very strong trend.

Sound investing, or a trading strategy, generally boils down to the numbers. That means quantifying and weighing how much risk you're taking against potential rewards, understanding what's "expensive" versus "cheap," and other numbers-based assessments.

Math applied to investing or trading is not unlike the due diligence you might do when buying a home or other real estate transaction. By some investors' thinking, if you don't do the math, you're not really investing.

Ready to crunch the numbers? One place to start is with the price-to-earnings (P/E) ratio, which is a widely followed benchmark for gauging whether a stock is overvalued, undervalued, or about where it should be. P/E ratios, also known as P/E multiples, measure how much investors are willing to pay per dollar of a company's profits. A stock's P/E ratio is most telling when compared against other industry peers, as well as to broad market benchmarks such as the S&P 500.

Markets are fundamentally run by humans, which means anxiety, fear, exuberance, and other emotions come into play. Markets go up, down, and sideways—sometimes for no apparent reason. It might be wise for beginners to accept what they can and can't control and try to avoid making potentially irrational, emotion-driven decisions (among other common trading mistakes).

It's also a good idea to carefully plot your short-, medium-, and long-term goals and time horizons; recognize the difference between "investing" and "trading"; define the type of investor or trader you are; and develop a profile that best suits your goals and comfort with risk.

Some professionals have equated trading to dating. They take a shorter time—say, three to six months—to audition various candidates to add to a portfolio. Investing, then, is more like a marriage, involving long-term decisions—six months or longer—based on criteria that matter deeply to each trader's profile. Remember, you're seeking a long-term trend or partner.