With the interest rates on certificates of deposit at ridiculous lows — below 1% at my local bank, which usually has higher returns than the big-name banks — what’s a cautious investor to do? I still dream of the heyday of 5.5% interest rates on 6-month CDs, when I laddered CDs to my heart’s content. But after the 20% down payment we made when purchasing our home last year, it took a while to rebuild our savings account. Now that we’ve got a healthy emergency fund, I’m looking to invest some of our extra cash.
The highest interest rates on CDs right now aren’t even touching 1.50% — so what makes me think the stock market can do better? The historical data does show that the buy-and-hold technique brings bigger returns.
One of my fears about investing in the stock market is that I’m not a buy-and-hold kind of person. If I see an individual stock I hold shoot upward and making a decent profit, I’m going to want to sell it and put the money in the bank. In the end, I’m just too conservative. What I really have to think about is finding stocks that offer solid dividends, which are good to hold long-term. Re-invest those dividends and your holdings grow.
Looking at the historical figures, stocks have provided the greatest rate of return on your investment. But beginners need to know a bit more about how to invest in the stock market — and I would be a beginner. These are some of the most basic things to know.
What Is Stock?
When you purchase shares, in essence you are claiming part ownership of that particular company. These share represent your “stock” in the business — when business is booming, you profit. When it’s not, you’ll share in the losses by seeing the stock price go down. The ownership of shares is mostly registered electronically nowadays, although stock certificates may be still issued by some companies (paper certificates are no longer required).
Buy-and-Hold
This is the most well-known and lucrative technique for investing in the stock market. It’s a long-term strategy meaning that once you purchase a stock, you don’t sell it for a period of time. This is the easiest way to weather the ups and downs of the market over time. Otherwise, unskilled beginner investors (like us!) would have trouble “timing” the market in order to turn a profit. Buying and holding stock also reduces the cost of fees paid to brokerages for every transaction.
Research Before Buying
You wouldn’t want to invest your hard-earned money with a bank that has shady business practices or seems financially insolvent, right? The same goes for businesses in which you’re interested in buying stock. Some companies are consistent earners, with the stock prices steadily trending upward. Then you have those that go the opposite way — prices spiral downward over time, and it’s hard to judge where the “bottom” will be. Call up the stock’s charts and look at how its been performing over time, in monthly or yearly increments.
You can also learn more about specific companies by searching for news articles. Maybe a specific pharmaceutical company is being heralded for its newest medication, or another company has invented a life-changing technology. This is a good indication that the business is strong and continuing to grow. Alternately, bad news, such as lawsuits and debt, should serve as warning signs that the company’s stock isn’t a good investment.
There’s much more to picking stocks, but these are the basic things to know before you throw your hat — and hard-earned money — into the stock market. Perhaps sometimes soon I’ll find a stock that tickles my fancy and start investing.
Long term investing success isn’t as unattainable as most people think. It’s actually pretty simple:
Invest for the long term in only the highest quality companies you can identify and don’t overpay.
That sounds simplistic, but you need to immerse yourself enough in the process to be able to define what a high quality company is and what attractive valuations are.
The best free educational material for anyone truly interested in investing (not trading and not passively putting money in mutual funds or index funds) is Warren Buffett’s annual shareholder letters, going back to 1977: http://www.berkshirehathaway.com/letters/letters.html
Sounds boring? Buffett is a very entertaining writer and an amazingly effective communicator. Read these letters and you’ll get an MBA education in long term investing.
Good luck –
I’ve been investing in the stock market for a little over two years now (starting terribly long before the crash). I love it! For me the key is that I only invest money I don’t need, so I can afford to lose it, although of course I don’t like losing money one little bit. I would caution you though not to pick just one stock, unless that’s just the first step in getting your toes wet. If you’re going to do single stocks, diversify across both individual companies and industries.
@Jackie: It would be just a “toe-wetting,” small investment in one stock. And yes, it’s like gambling — only invest what you can afford to lose!
We have some 401k and IRA savings in stocks that I’m just leaving alone for now. Other than that, I’m putting all extra cash toward paying down debt, which offers a guaranteed return.
Nicole:
I would advise you to be VERY wary of Buy-and-Hold. It is heavily promoted by The Stock-Selling Industry. Not because they want to help you out. Because they make higher commissions on stocks than on anything else and so they think it’s wonderful if lots of middle-class people see no alternative but to invest in stocks.
Stocks are wonderful when they are priced reasonably. Stocks are not priced reasonably today. Read Robert Shiller’s “Irrational Exuberance” and wait until the P/E10 level (Shiller explains why it is important) is at 12 or so before moving heavily into stocks. After the next crash, we are going to see great times for stock investors. But we are not there yet.
Rob
Hang on 🙂 Do you want to invest in a stock itself like Apple (AAPL) or in an index fund? I tend to be an index fund sort of person but the risk I take is I invest in Brazil 😀
@FB: Thinking a small investment in a single stock to start. Then possibly looking at index funds/ETFs.
It really can feel like someone is trying to bully us into the stock market with these low interest rates. I was right there with you with my CD ladder in 2007. About the only CDs I have now are the ones I forgot to cancel before the grace period was over. The freedom of having the cash on hand is probably worth more than whatever pathetic interest rate they’re offering now.
I’m far too scared to invest but plan to when I have cash in abundance…. So prob 2 more years I think.
Good luck.
I think a colleague of mine dipped into the stock market very well by investing in a few ETS. His biggest investment was in the S&P ETF (symbol: SPY). Now he owns stocks, but he is not exposed to any one stock and he does not have to pick stocks, either.
I wouldn’t be comfortable investing my emergency fund…b/c if the stock market tanks again…and then i have an emergency – what would you do?
@Jessie: I missed the key word — we’ve be using our “extra” cash. Although to be honest, I don’t differentiate between an emergency fund and liquid savings. I’d use anything over what I consider to be an “emergency” level of cash — for illustrative purposes, anything over $15K would be considered money to use for investments.
[…] This post was mentioned on Twitter by Mark Molendo, Nicole. Nicole said: Getting Over My Fear of Investing in the Stock Market http://www.rainydaysaver.net/2010/10/fear-investing-stock-market.html […]