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Advice for New Stock Market Investors

While some novice investors spend long hours pouring over individual stocks to find the best opportunity, many financial advisors suggest that starting a portfolio with individual stocks is a rookie mistake. If your portfolio is not established, you run the risk of losing everything if your single stock fails. Instead, it is suggested that new investors select low-cost mutual funds. Mutual funds take the investments of several contributors and spread them out over a range of stocks, making them safer choices for those just starting out.

Established investors, however, may wish to purchase stock in individual companies. Individual stocks have the potential for great rewards, but they also come with substantial risks. Selecting the right stock can yield returns of more than 300 percent in just five years, while mutual funds typically see much smaller gains. A poor selection can spell financial ruin, depending on how much you invest and how poorly the company in which you purchase ownership fares.

Informed Decision v Enthusiastic Reaction

Indeed, it is wise to remember that purchasing a stock ties you to the success of a company in a very tangible sense. Your investment allows the company to continue to develop products or services, and the return on those funds lies in the effective marketing and sales of these commodities. You should always invest in companies in whose success you believe, but experts suggest that the greatest market strategy is starting with what is familiar.

While it is easy to get excited about a product or service, a good investment is one that is made in a company whose business plan is accessible to you as an investor. While earnings reports give information about current business trends, a solid plan for future development is necessary for the success of any business. During the dot-com bubble, many companies that were favored by investors for their innovative ideas failed due to improper planning. Those investors lost every penny that was lent to those companies. To avoid such an outcome for yourself, do plenty of research. Investigate the financial reports of the company as far back as possible to determine trends: One good quarter does not guarantee the success of a business.

As a new investor in the stock market, be cautious with your investment plans and never borrow money to fund hopeful investments. The risks of loss are very real. Invest only what you can afford to lose.

Choosing Stock

Investment professionals suggest finding stocks that are undervalued. This means that the stock price is low in relation to the earnings made by the company. You can find the price-to-earnings (P/E) ratio by dividing a company's stock price by its net income. A P/E of 15 or less is considered inexpensive, and one above 20 is considered expensive. However, buying cheap stock doesn't always spell success. Choosing a stock based on price alone is ill-advised. Study the stock and determine why their value is high or low so you can estimate in which direction it may lead after purchase.

Plan Movement in Advance

Before you purchase a stock, determine the best time to sell. You may wish to sell when the company in which you invest cuts its dividend or your stock dips below a certain point. If you do not set a selling point, you may panic when short-term changes negatively affect your stocks, which may keep you from seeing later gains.

Jaye Ryan is a freelance writer who likes writing about all kinds of investments and finance issues for Octopus Loans.