Stock Investment Tips for Beginners

When learning how to trade, you can be your own research director, money manager, and market expert. Regardless of what kind of trend the market is in, it's always a good time to educate yourself about the stock market and where potential investing or trading opportunities may exist.

But first, here are five pointers for anyone wondering how to starting trading stocks.

Consider Warren Buffett's advice: "Never invest in a business you cannot understand." Traders of all experience levels should think about the companies that provide products and services they use frequently. 

Asking basic questions about how you spend your time and your money is a good way to start constructing an investing 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 potentially make money and share some other benefits like 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 new traders to wrap their heads around fundamental metrics like revenue and basic earnings per share (EPS)—a rough measurement of a company's profit per outstanding stock share. 

Publicly traded companies typically report earnings and other financial information like EPS every quarter. So for any stock being considered, 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, traders can gain insight into what the CEO is thinking and what questions analysts and investors are asking company leadership. These calls can help provide the perspective of "investor," rather than someone just purchasing stock shares. 

Many market professionals use chart patterns, trading volume statistics, and other technical indicators to help 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 way to help identify trends is by combining 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 trading 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 risk against potential rewards, understanding what's "expensive" versus "cheap," and making other numbers-based assessments. 

Math applied to investing or trading is not unlike the due diligence someone 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 priced 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 like the S&P 500^® index. 

Markets are ultimately run by humans, which means anxiety, fear, exuberance, and other emotions could 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 plan 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 risk tolerance. 

Some professionals have equated trading to dating. Traders will typically take a shorter time—say, three to six months—to audition various candidates to add to a longer-term portfolio. Investing, then, is more like a long-term relationship—six months or longer—based on criteria that matter deeply to each trader's profile and are projected to stand the test of time.