How to Invest in the Stock Market for the First Time

You have that extra cash saved up and you're ready to invest in the stock market. But how do you get started? The first thing you have to keep in mind before investing is that you should only invest disposable income. Disposable income is extra cash that you or your family are not dependent on.

Another factor to consider before getting started is how much money you have to invest. If you buy anywhere less than 1,000 dollars worth of stock, trading fees will eat up your profits. For example, say you want to buy $100 worth of stock and your broker charges $10 per trade. So you get in the stock at a cost of $110. After one year, the stock goes up 20%, so you're stock is now worth $120 and you decide to sell out. This will cost you another $10. After the cost of two trades, you managed just to break even, even though your stock went up 20%. However some brokers allow you to invest small recurring amounts with cheaper trading fees, so the average person could buy and hold stock and still make money.

You should also consider your investment style. Are you buying and holding for the long term or investing for the short term? As a beginner investor, you should not consider day trading. By law, you have to have $20,000 in order to day trade. Day trading is extremely competitive, stressful, and requires technical analysis and full time attention to your computer screen. Most people lose their money day trading before they learn how to do it properly. If you buy for the long term, you can still actively manage your account buy trimming off shares when your stock goes up, and using that cash to buy them back during a market correction.

What level of risk do you want to take on? High yield dividend stocks such as real estate investment trusts and oil and gas trusts pay out anywhere from a 10-15% yield. In an unpredictable market getting paid dividends is a huge safety net. Blue Chip stocks are well established companies with stable earnings such as Kraft and Proctor & Gamble. These stocks pay out dividends too, and their share price could gain 10% a year when the economy is good. Financial stocks, basic material stocks, and industrial stocks do well when the economy is roaring, but get beaten down in a bear market. Growth stocks such as Apple don't pay out dividends, but their share price will continue to rise dramatically as long as their earnings continue to grow.

How do you pick stocks? You should pick companies that you believe in and understand their business model. Never buy a company that you don't understand. One of the most famous investors and the third richest man in the world, Warren Buffet, never bought Google or other technology stocks, because he didn't understand them. Also, look to see how much debt a company has, because debt can constrain growth. Additionally, beware of decelerating growth, which will lower the stock price.

There's also some stock market terminology that you should understand before investing. Earnings per share is the profit the stock made in the last fiscal year. The stock usually trades at a multiple times its earnings called the P/E ratio (price to earnings ratio). The higher the P/E ratio, the greater the projected earnings for the stock. GE has a P/E ratio of 15, while Chinese search site Baidu has a P/E ratio of 89. Stock volume is the number of shares traded per day on a stock. Higher volume means there is more interest in a stock.

Now it's time to choose an online broker. Carefully compare each ones trading fees, and make sure they have no maintenance fees which will eat up your profit. Don't be drawn in by an offer for free trades or cash gifts, but if they become a deal breaker, take the offer. Beware of any asterisks and read the fine print carefully. Some brokers lure in new clients with lower trading fees and then charge them full price later on. Standard stock exchange hours are from 9:30 a.m. to 4:30 p.m. You don't have to watch your stock price in real time, but do listen to the conference calls every quarter when your company reports earnings.

As you get more experience, you will learn more along the way. In time you will become an intelligent and confident investor. Good luck!