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For the beginner stock investing can be kind of daunting. There are, after all, over 2,800 different stocks and funds actively traded on the New York Stock Exchange alone. That is a healthy number of choices and if you are new to the stock investing game it can easily seem a bit overwhelming.

 
If you are new to investing you need to ask yourself one main question: “What are my goals?” If you’re investing for retirement, fun, or to build a large position you can cash out to use for other things, you’ll use different investing strategies. If you’re investing for retirement you’ll have to take into account your current age, risk tolerance, the age you’d like to retire and how much you can invest each period. You may want to create a chunk of cash you can use to fund other things, weather that is other investments or fun in the sun. You could also be looking to start investing in the stock market as a hobby to occupy your spare time, and make a bit of money if you do well.

All of those reasons are great reasons to get started investing in stocks, but you’ll want to begin with a different approach for each. One thing should be the same though. You’ll want to learn as much as possible about investing, economics, human behavior, and finance. It’s often been said that knowledge is power, but in this case knowledge is the difference between your portfolio going up or evaporating altogether.

If you’re investing for your retirement and you have a long time to go before you retire, you can invest in stocks that may be a bit more risky than if you’re investing for retirement and have only 10 or 15 years to go before you want to hang it up. You can afford to invest more aggressively because you have time in which to absorb short term losses. In most cases aggressive investing will carry with it a bit more risk and your portfolio will probably have a bit more volatility. Volatility is the propensity of your portfolio to go up and down.

If you are investing for the short term, you want to be a bit more conservative because large swings in your portfolio’s value could cause you to be in the middle of a drop at precisely a time when you need to be withdrawing funds. If you have a longer time horizon, you have time to absorb such short term losses because in time the market should carry your stocks higher again.

If you’re investing purely for fun, you can afford to take as risky or as conservative a position as you’d like, depending upon your mood. If your research unearths a stock that seems to have promise, you can go ahead and take a position (buy some). If it drops, well, you’re only in it for a good time anyway. If it goes way up, you’ll get the investor’s rush as your portfolio rapidly grows.

In the majority of cases I like Warren Buffett’s value approach to investing. Value investing is buying stocks in good companies that are, by most analytical indicators, undervalued compared to stocks of other companies in their industries. In many cases some of the most boring stocks can be some of the strongest performers. I did a post a while back about boring stocks. On the other hand, some of the sexiest, most attractive stocks can such your portfolio dry in a heartbeat.

You can invest in individual stocks or mutual funds. Mutual funds are funds comprised of a large number of stocks or other securities and are managed by those who in theory know better than you about such things. If you want to choose your own stocks, and want to stay in the value investing mold, here are some pointers as I see it. Value stocks can earn you nice returns, but as with many things stock market related, can eat up your funds in a hurry too. So called value companies are in many cases experiencing some sort of trouble, which is why their stock price is so low in the first place. Your job as an investor is to determine what kind of trouble they’re in and if they are likely to recover over the long term.

If you choose a company that is attractively priced now, but has attractive prospects going forward, you’ll do very well. However you can easily pick a company that is in fundamental trouble and has limited prospects for future success. In that case you’ll likely lose most or all of your investment in that stock.

Here are some of the fundamentals you can look at to help determine if the company has good prospects for success in the future. One of the most important is the cash flow. If the company has a history of positive operating cash flow, and has positive operating cash flow in the last year, that is a good sign. There’s an old saying in business “Cash is king” and that’s certainly true when you’re analyzing a company whose stock you’re considering investing in.

Another important thing to look at is weather the company is profitable. To determine that you need to look it’s net income. If the company has a positive net income for the previous year, preferably two, that’s good. Remember as an investor, you’ll be a part owner in the company. You can feel better about it’s prospects to make money for itself in the future, and by extension, make you money, if it’s doing so already.

Look deeper at the operating cash flow. How was the money generated? If the operating cash flow is greater than the net income that’s a good sign for you as a potential investor. If the company’s operating cash flow for the past 4 quarters are greater than its net income you can usually give the company strong consideration. Also, make sure that the cash flow didn’t come from sale of assets or stock, but from the company’s actual operations of its core business.

One last thing that I like to check is what is called the “current ratio”. That is the company’s current assets related to its current liabilities. If it is decreasing its liabilities related to its assets ever year that is another good sign.

So, once you’ve figured out why the heck you’re thinking of investing in the stock market and learned what you can about how things work, you can take the plunge. Remember by buying stock in a company you’ll be buying a piece of that company, hoping to participate in its future success. Company’s that are well run, in growth industries, and undervalued compared to their competitors stand a good chance of success. On the other hand, you want to steer clear of companies in declining industries that have poor financial indicators and management with shaky track records.

You may want to trade using a full service broker or use a discount broker. A discount broker will give you little or no guidance, but charge you a very small fee each time you make a trade. On the other hand a full service broker will make recommendations but charge you for doing so. You’ll have to pay them each time you buy or sell anything. Some full service brokers are very good and can give you solid recommendations, while others are only interested in the commissions they earn from your trading. Most are somewhere in between.

As with many professionals you’ll want to carefully investigate their track records and talk to their current customers. If you have friends and associates who have a broker they are happy with, and has demonstrated long term success, you may use them. There are also fee based brokers that don’t charge a commission of reach trade you make, they charge you a flat fee no matter how many trades you make. If you plan to make a lot of trades and want the advice and service of a full service broker, a fee based broker may make sense for you.
 

If you plan to make quite a few trades, but feel comfortable doing your own research and choosing your won stocks, you probably want to go with a discount broker. You’ll pay a much lower fee. If you don’t want or need the advice, there’s no reason to pay for it. I did a post comparing online discount  stock brokers a few months ago.