I want to invest but I'm clueless about stocks

John W. Schoen Senior Producer • Profile • E-mail

Just about every week, we get questions on two very basic topics. Like Tiffany in California, many would-be stock investors find themselves stuck before they even take the fist step and want to know: How do I get started? Then, like Sajjad in Pakistan, there are the would-be entrepreneurs want to know how to translate their dream of starting a business into reality.

CLUELESS IN CALIFORNIA
I am a first-time serious thinker of investing in a stock, I haven't a clue on where to begin: With whom or what company? All I know is, I want to invest. I have tried looking info up online but I am more confused that ever. Is there any way you can give me a breakdown on how to begin and what to trust and what not to trust? I am literally like the most clueless person on this; I could really use basic instructions on how to begin.
Tiffany, Murrieta, Calif.

This is one of those annoying answers that starts with a question: Why do you want to invest? Are you like most stock investors – who simply want to take on a little more risk to get a greater return on your savings? Or are you one of those few who really like the idea of rolling up your sleeves, searching through the thousands of stocks out there like a tag sale regular trying to find the bargain that everyone else passed up? These are two very different kinds of stock investing.

If you’re the former, the question of finding someone you can trust is paramount. Start by crossing off the names of anyone who isn’t registered with your states securities administrator. (You can find out how to contact your state's office, along with useful tips on spotting scammers at the North American Securities Administrators Association Web site.)

Financial advisors come in several varieties. All good advisors should the spend time to answer your questions, find out how much risk you’re comfortable with, keep up with changes in your financial life, etc. But some get paid commissions to sell you various investments. If you’re a novice, that's probably not the right person for you. Ask how they get paid.

Good financial advisors are a lot like good teachers and coaches: They listen well and give you straight answers. Unfortunately, there’s no directory that ranks financial advisors. And even if there were, it might not mean a whole lot: Often, what makes the relationship work is chemistry.

So ask around, interview as many as it takes. (You may prefer the convenience of doing this over the phone or the Internet. We’re a little old fashioned: We prefer to talk to financial advisors face to face.) Whichever you chose, ask as many questions as you like about investing. You’ll learn three things: 1) the answers to your questions 2) whether the person seems to know what they’re talking about 3) whether they have the patience to take on a novice investor. If you decide to go ahead, start slow with a small amount of money and sees how it goes.

If the answer to our original question is that you’re the second kind of investor – and aiming to become the next Warren Buffet -- you have a lot more work to do. Picking your own stocks can be extremely rewarding for several reasons. As you get good at it, you’ll make money. And you never have to worry about trusting someone else. (Though it will probably take awhile to trust your own instincts.) But learning how to pick stocks is a lifelong endeavor.

There’s a central paradox to stock investing that confuses many newcomers. On the one hand, it all looks very technical. People on CNBC talk about “industry multiples,” “short squeezes,” and “dividend yields.” There are earnings reports to read, SEC filings to decipher, and financial statements to pick apart. There’s even something called “technical analysis” that tries to predict where a stock is headed by plotting all kinds of lines on a stock’s price chart. There are lots of good books out there on securities analysis, and if you’re going to learn to pick stocks, you’ll need at least a basic understanding of what’s in them.

On the other hand, all the numbers and graphs in the world can’t tell you which stocks will go up and which ones will go down. Worse, just when you’re up to your eyeballs in discounted cash flow calculations, you’ll hear some hot-shot investor come along and say he bought a stock that just tripled simply because his wife likes the product they make.

Do “gut feelings” really matter? Yes, but not without doing the homework first. Picking a stock without looking over at least the highlights of key financial information is like buying a used car without asking any questions. Still, even if your mechanic friend says it checks out fine, you shouldn’t buy it if it doesn’t “feel” right.

So how do you make sense of all this financial mumbo-jumbo? Rather than spending hours in the library reading mind-numbing books on stock picking, many newcomers prefer to join an investment club of other like-minded souls. There are several benefits: you get to meet new people, stock picking becomes a social event rather than solitary pursuit, and you should (theoretically) benefit from the collective wisdom of the group. (To find out more about joining or starting a group, check out BetterInvesting, the Web site for the National Association of Investors Corp.)

By pooling both your intellectual and financial resources, you can invest in more stocks – and learn faster – than if you try going it alone. Eventually, if group investing isn’t to your liking, you can always strike out on your own later when you feel ready.

And by that point, you maybe ready to become a financial advisor yourself.

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