Once you have chosen a broker and funded your account it is time to make your first investment. If you havent yet found a broker thats suitable, check out our article on finding the Best Broker for Your Needs. Also be sure to check out IRA, or Taxable Account to decide which type of account is best for you.
Your first investment will depend largely on how much money you are investing with. Assuming youre starting with less than $1000, a single mutual fund will suffice for now. If youre starting with less than $500, your mutual fund options will be limited, so we would suggest two or three stocks of varying risk levels.
Investments fall into two categories: risky and extremely risky. Every company is capable of pulling an Enron.
What is important here is to understand why you are investing, to determine your goals. Your goals will determine how well you can tolerate a sudden plummet in your portfolios value.
Are you investing $1,000 to make a multimillion-dollar fortune? It is highly unlikely, but possible. In order to achieve this goal, though, you will have to make some very high-risk investments in companies that may go bankrupt, leaving your investment worthless.
Would you invest in a fledgling $22 million Midwest textile mill with new management ? If you did in 1965, when Berkshire Hathaway was trading at $18 a share, youd now have $450,000 for a $100 investment.
Now, most mills in the Midwest have gone out of business in that time, so if you chose almost any other company, youd have lost your $100. Thats why they call it risk.
But if there were no risk, no one would invest. Because without risk, there is no return, and returns are why we invest.
If you are taking the high-risk route, which is only advisable with a small part of your holdings (under 10%), you will want to invest in small companies. How small? The smaller the better.
The problem is, the smaller the company, the harder they are to find. Once a major news outlet does a story on the small biotech thats five years away from releasing the miracle cancer cure, investors already know about it. Potential risk and returns are already baked into the price of the stock.
Thats why its important to do your own research. Relying on other peoples opinions is specious at best. By the time they tell you (and a million other readers) about it, investors have already driven the price up to a reasonable point.
Go to the source: government websites are great places to find out about small companies with big ideas, getting research grants and distribution deals. From there, check out EDGAR at sec.gov and read the 10-Ks and 10-Qs (annual and quarterly reports) of any company you are about to invest in. This will give you the big picture on what the company does, who their competitors are, and how they stack up.
The importance of diversity cannot be overstressed. Even if you are only investing $500 or less, it is important not to put all of that money into one stock.
You should have at least three stocks (or one mutual fund) in your first purchase. And if you are going the high-risk small-cap route with one of your investments, be sure that the rest of your investment (50%) is in one or two larger, more established companies, in different sectors than your small-cap find.
Its important to monitor your first investments, but dont obsess about it. If you check its price more than once daily, I would suggest getting a dog or another hobby. There are better ways to spend your time than hitting the Refresh button.
But you will want to take not of your investments performance. If you see it fall more than 8%, take a look at recent news releases and see if there is something damaging that may cause it to fall further. With small caps, you will see dips and rises on the order of 10%, but it is not always a sign of doom or success ahead, so dont get too excited about it. But if the company consistently underperforms and the stock shows signs of falling again, you may want to re-evaluate your position and cut your losses.