For the novice, learning how to invest in stocks can be a daunting task. There are thousands of companies that one can purchase shares from not to mention the different business sectors. To make sense of the many developments and possibilities out there, the beginner keeps the approach simple. Here’s how to get started:

1. Follow companies that you understand: If you can comfortably sum up briefly what the company does, chances are you’re familiar with their business activities. With a better understanding of the company’s operations and the industry they compete with, the investor will be able to make a properly informed decision.
2. Have fun researching the company: When observing people who do well in their respective jobs, chances are they enjoy what they’re doing. The same approach should be used for stock investing. If you enjoy researching the company and its respective industry, you are more inclined to do a thorough analysis, improving your odds of picking a winner. It’s like the baseball fan enthusiastically poring over the statistics on his favorite team to determine the outcome of the game. With passion, success will follow.
3. Use the Internet to get information: Not too long ago, getting pertinent information about companies was expensive and only accessible to well connected players. Thanks to the Internet, useful corporate and industry information is readily available to all either for free or for a moderate fee. There are a slew of financial portals providing comprehensive information and even the company websites themselves.
4. Understand some accounting and economics: The company’s financial statements reveal whether they are profitable or not. To be able to evaluate their health, the investor must be able to understand the financial reports issued by the company. Economics refers to the ongoing dynamics between supply and demand. If there is strong demand for a product where there isn’t adequate supply to fulfill it, a company can charge more for their products.

Basic Advice

Purchasing stocks for investment is similar to a smart gambler’s betting strategy. They only go in if they know the odds are in their favor. If the probability of making money is low, they won’t commit funds or quickly cut their losses. To improve your odds of profitable stock investing, here are some pointers:

1. Go against the crowd: Remember that hot stock play everybody is talking about, including your barber. If everybody and their second uncles bought the stock, there’s nobody left to purchase the stock in order to push its share price higher. In this situation, it’s time to sell. The opposite can also be true. If everybody is negative on the corporation, the astute investor can pick up its shares at an attractive price.
2. Keep it simple and boring: Some of the best managed companies tend to be those that are in boring unglamorous industries. Its executive team is focused on continuously improving their operations, client relationships and building value for the shareholder. You rarely hear of these executives since they rarely grant interviews to the media.
3. Beware of the hype: The CEO that has a bold vision of radically changing the way business is done is a warning sign for the investor. These attention seeking egomaniacs are more interested in appearing in the front pages of a business magazine than actually improving their companies’ fortune.
4. Look out for excessive debts: One of the main reasons why companies fail is they carried too much debt. With heavy debt loads, a company has less capability to spend on business initiatives, making it less competitive. Higher interest rates or a couple of unprofitable operating quarters can push a company to the brink of bankruptcy.
5. The dividend is your best friend: A well run company usually pays out dividends to its shareholders. A dividend is a payment made to shareholders by the company as compensation for holding their shares. Because cash must be put aside for dividends, these corporations must carefully scrutinize every dollar spent on business activities to ensure profitable growth. These corporations are usually more disciplined and pay greater attention to building shareholder value.
6. If you’re wrong, quickly cut your losses: You are human after all. Chances are you will make the wrong call on a stock investment. The test of a good stock investor is how they handle a bad investment. After further analysis, you concluded you were incorrect on your selection. The prudent thing to do is to sell the security and deploy the proceeds to a more productive investment. The worst thing to do is buy more shares to average down your average cost per share. One rarely makes money from constantly buying poorly managed companies.