Like bargains? Did you get up at 5 AM on Black Friday because you intended to buy a specific item well below its normal price? Do you recognize an abnormally low price on an item you want - and the buy it without procrastinating?
If you answered “YES!” to all three questions, you may be a good candidate for success in today’s stock market. If that’s appealing to you, here are the basics IF you’re ready to get started building your wealth.
First, and foremost, don’t listen to “tips” from well-intentioned friends and relatives. Don’t discuss your investing activities with others. Be your own person, build your knowledge and success quietly, and relax knowing you are mastering a reliable approach to wealth building.
To get started, you’ll need to commit a sum of money, that will reside separately from your day to day living expenses. You can start with as little as $1,000, but $5,000 will give you more flexibility. Open an online trading account with this money. My choice is TDAmeritrade.com, however Etrade.com or Scottrade.com are suitable alternatives.
Once you open the account, don’t rush out and buy the first stock that comes along. Just know that you have begun the process. Now you’re ready to take the next step - choosing a single company’s stock. There are numerous stock market segments you may choose to follow. You may prefer retail stocks like Lowes Hardware (LOW), Bed Bath & Beyond (BBBY), or Apple Computer (AAPL). Industrial stocks might include General Electric (GE), Alcoa (AA) or Caterpillar (CAT). Financials could be Citibank (C), Bank of America (BAC), or Freddie Mac (FRE). Others market segments include pharmaceuticals, technology, or aerospace.
Once you zero in on a market segment, it’s time to choose a specific stock. In doing so, keep in mind that you’re not buying stock to impress your friends (or yourself), to provide you with a sense of pride, or any other selfish purpose. You are buying stock to build wealth - your personal, private wealth. There are two key criteria you should follow: 1) choose a strong company rated three stars or better by S&P (Standard & Poors), and 2) choose a stock that is trading well below its normal trading range (in other words at a bargain price).
For your first purchase, invest no more than 25% of your available cash. If the stock drops substantially below your first purchase price, buy an equal amount with another 25% to average your cost downward. The purpose of your initial investment in a single stock is not to get rich, but to help you become acquainted with the buying & selling process. When the stock rises by $1 per share - sell all of it. Congratulations, you’ve just become a success at investing in the stock market.
If the stock goes down substantially, consider using your second 25% to purchase more. Then, wait - be patient. It may take time, but the stock will eventually rise. When it goes up a dollar - cash out.
Now comes the challenge. With your new-found success, you may be tempted to jump back in - and pay too much. You may also be tempted to buy a different stock while you’re waiting for the first one to go back down in price. DON’T!
You may have to wait weeks for your choice stock to drop back to where you bought it last time - or even lower. When it does, repeat your first purchase. Remember, this exercise is to help familiarize you with the procees, not to make you rich. If you make $1 per share again, you will begin appreciating the value of this approach. You’re now on your way to creating your own wealth.
In my next Factoidz article, entitled “Charting your way to wealth in stocks!”, I’ll explain how to use charting to recognize the right “Buy” and “Sell” points. For now, stick to your one stock and get the practice you’ll need to move to the next level.
