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So you want to invest in the stock market. Good for you -- because for most of us, stocks are the best way to build wealth. Don't just jump in, though, as stocks can wipe you out, if you don't know what you're doing. Fortunately, investing isn't like brain surgery. You can do it profitably if you just approach it in a sensible manner. Here's a 5-point checklist for learning to invest.
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Step 1: Read up
First off, prepare to read and learn. A lot. And to keep reading for the rest of your investing life. The more you understand about how the stock market works, and about how businesses grow and fail, about how successful investors have amassed their fortunes, the more effective you're likely to be at investing. Here are some books you might start out with:
- The Millionaire Next Door: The Surprising Secrets of America's Wealthy byThomas J. Stanley and William D. Danko: This book can help you develop a good mindset for saving and investing, pointing out how financially successful people get that way. (For example, they're not afraid to use coupons.)
- Bogle On Mutual Funds: New Perspectives For The Intelligent Investor by John Bogle: John Bogle is the venerable father of index funds and this book will teach you a lot about mutual funds in general, index funds in particular, and why index funds are excellent investments for most investors.
- One Up on Wall Street by Peter Lynch: This classic book is a great introduction to investing and stock-picking -- though remember, simple index funds can be nearly as powerful.
- Buffett: The Making of an American Capitalist by Roger Lowenstein: This is a terrific biography of Warren Buffett, arguably the world's greatest investor. You'll not only learn about his remarkable life, but also about what makes great businesses great and how you might go about finding them.
- The Little Book That Still Beats the MarketbyJoel Greenblattand andThe Little Book of Value Investing by Christopher H. Browne: These two books will help you learn about investment strategies and how to zero in on promising investments.
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Here are more great books, for when you seek meatier fare.
Step 2: Think about yourself and your situation
To get the most from investing, you need to understand your own temperament. (Are you patient and not prone to panic?) Think about your goals. Are you investing for a retirement that's 10 or 20 or more years away, or for college tuition that you'll be paying in three years?
Long time frames are best suited to stock investing, while sticking with less volatile options such as savings accounts, CDs, and money market accounts are best for short ones. Think about how much interest you have in investing and how much time you have, too. Will you be willing and able to follow and keep up with the companies in which you invest? If not, index funds may make more sense. The better handle you have on yourself and your situation, the better you'll be able to select suitable investment styles and strategies.
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Step 3: Start with a mock portfolio
Before you actually commit your hard-earned money to stocks, it can be good to start with a mock portfolio. You might even start one as soon as you begin reading and learning about investing.
You can maintain one in a simple notebook, but using online portfolios will make it easiest. Select a financial site that lets you set up a portfolio to track and pretend that you've bought shares of companies that interest you.
Once you've assembled a mock stock portfolio, check in on it regularly to see how it's doing. Read up on the progress of the companies in which you "invested." Don't draw any firm conclusions over a short time frame, though -- if the stocks that you had great faith in have not done well in six months, that doesn't mean you're a bad investor. Successful investing is a marathon, not a sprint, and even great stocks will have slumps, some even several years long.
Step 4: Open a brokerage account
You'll need a brokerage account, so look into the possibilities there. Our broker comparison guide showcases some solid ones. Consider their commission charges, but know that you needn't go with the very lowest. Great investors generally don't trade frequently, so be sure to weigh other factors, too, such as whether they offer access to the mutual funds you're interested in, whether they have brick-and-mortar locations if you'd like that, and how extensive their stock research offerings are.
Image source: Flickr user Carol VanHook
Step 5: Keep it simple
Finally, keep it simple. You needn't dive into fancy options trading and commodity speculation -- and, indeed, that can really hurt your results. Simply investing in an inexpensive, broad-market index fund will have you outperforming most managed stock mutual funds and many investors who select stocks on their own, too.
Seek great companies with lasting competitive advantages (such as economies of scale, great brands, and difficult-to-penetrate industries) and aim to buy into them when they're undervalued.
At the end of the day, investing can be extremely rewarding -- literally. It can even be fun
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Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.