Investing In Stocks For Beginners – The Simple Rules Method
It’s my belief that anyone can invest in the stock market successfully and you don’t need to be an expert to do so. All you really need to know is how to identify a good company that has a high return on equity, low debt and a few other key fundamentals.
So this guide to investing in stocks for beginners will go over the how to’s and simple steps that you need to know so that you can find those great companies.
Do You Have The Cash To Invest?
Now obviously you’ll need some money to get started with (and if you don’t why not try doing a spending detox *cheeky wink*). Probably it’s best to start with around $3,000 as an absolute minimum. Usually most trading accounts won’t let you start with anything less than about two grand anyway, so it’s nice to have a buffer. If you’ve got the cash to invest then it’s time to do some research.
Choosing Blue Chip Stocks
The very first step is to make sure that you choose those high capitalization stocks – those companies that are considered ‘blue chip’ if you will. This will give you the companies that have a good grounding in the business world – and you want to stick with solid companies that are not here one day gone the next.
High Return on Equity
The next thing you want to make sure is that the Return on Equity is over 15%. This is one of the rules that Warren Buffett swears by, and who am I to argue with the big man? Besides you’ll find that those companies with high ROE’s are usually the ones that do the best over the long term.
Increasing Earnings Growth (Quarter on quarter)
The third rule is make sure that they have positive earnings growth. This may seem like a given (you want the company to be profitable) but so many investors miss this important step. Let’s be clear, the stock price can’t rise if the company isn’t making a profit. ‘nuff said.
Avoid Companies With High Debt
The company should have low debt. Just like you wouldn’t date a guy who is up to his eyeballs in debt, so too you shouldn’t invest in a company that has high debt either. Now SOME debt is ok of course because it can help the company grow and expand, but TOO MUCH is risky. So steer clear of anything over 75%.
History Of Good Returns For Investors
Finally you should check the history of the stock price. Now I know that’s easier said than done when we are in a bear market (like now) because everything seems to be falling, but if you look over the long term you’ll still find some winning stocks that are still increasing in price. And if they can increase in price when the market sucks, imagine how much they’ll make for you when the market recovers (and it will – it’s just a waiting game right now).
Dividend Yield Can Help Too
It helps if the stock pays a good dividend yield since that can help buffer those times when the market isn’t increasing. It means that you are still getting an income even when the stock price is flat. Not all companies pay dividend’s though, so it’s definitely not a deal breaker, but it can be a nice bonus if they do pay good yields.
Above all though, try and avoid penny stocks (which you will if you follow the rules here anyway). I know they can sound tempting, but most of the time they are not. Remember it’s just as hard for a cheap stock to double in price as it is for a blue chip. And that’s the truth.
All of these steps are outlined in more detail in my book 5 Simple Rules for Investing in the Stock Market (or you can just read my blog for free, that’s fine too).