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What you need to do before you start investing

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Once you have selected your online broker and set up your account according to their procedures - now what? Before you start investing, you should read this.

Image courtesy Flickr user artemuestra: http://www.flickr.com/people/artemuestra/ Don't make the same mistake I did when I opened my first online broker. I ran out buying stocks because they gave you 30 days of free commission. But remember, brokers make money even if you do not!

If you just opened your first online broker to start investing, it's a safe assumption you have never put a trade into the market, at least all by yourself. No worries, many online brokers make the process very easy but there are several things you should do first to put the odds in your favor.

First and foremost as a new (or seasoned) investor you must do your homework before you start investing and understand why you are entering into a position, and in turn, develop a trading plan around a catalyst. The plan should include:

  • A catalyst for entering and exiting.
  • Your entry level.
  • Your exit level.
  • Each plan should have one entry point and two exit points: a catalyst to sell and a stop loss.
  • When placing orders, always do yourself a favor and use limit orders rather than market orders.

Even before placing your first trade as a beginner you should practice using your broker's platform. If the broker has a paper trading system try a couple of practice trades. In fact, you can practice setting up a portfolio and test your strategies before using your own money and start investing for real.

The hardest things for a new investor/trader to handle is buying your stock/ETF and having the price move lower the second you buy it.

One strategy to help combat this from happening is to buy in increments and not place the entire position in one transaction. We will explore this and more strategies in future articles.

The last thing I want to leave with you with for now is when setting up your portfolio for the first time, smaller is better and diversification is the name of the game. Ever have your grandmother, father, mother, and older sibling tell you not to put all your eggs in one basket? Well that statement is so true, and the key to success. Even the big fund guys do it. They may do it using very technical and complicated hedges, but they do not put all their eggs (stock) in one basket.

This weekend's homework: Start looking around at different companies' products you use in life. Do you use an Apple computer or Microsoft? Ask yourself why? Do you shop at a particular store? You get the picture. Find two or three companies in five different sectors and next week we will get started on pulling together a diversified portfolio of five stocks for you to start investing in.

Here is list of sectors to get you started thinking about different companies.

  • Basic Materials
  • Conglomerates
  • Consumer Goods
  • Financial
  • Healthcare
  • Industrial Goods -
  • Services
  • Technology
  • Utilities

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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