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How To Invest

Most people want to invest. Only one thing stops them from doing it: they don’t know how to invest.

It’s easier than you think!

Before you learn how to invest, there are a few basics to understand—first and foremost, what a stock is. A stock is an equity investment that represents part ownership in a company. When you invest in a stock, you own a share (or shares) of that company.

The most common way to buy a stock is through a brokerage firm. Thanks to the internet, using a brokerage firm to invest is easier—and more affordable—than ever. There are a variety of popular online discount brokerage firms—TD Ameritrade, E*Trade, Fidelity, Charles Schwab—and none of them charge more than $10 every time you make a trade.

Now, if you’re just getting started, you can choose to invest in just one or two stocks; that’s all some people can afford, and that’s fine. But for those who can afford it, an ideal portfolio consists of about 10-20 stocks from a variety of industries (technology, banks, housing, retail, energy, etc.). It also makes sense to invest in different types of stocks—growth stocks, value stocks, dividend-paying stocks, emerging markets stocks.

However you spread out your investments, the goal is to put together a portfolio that’s diversified enough that you aren’t overly susceptible to a collapse in any one industry. For instance, if you have all housing stocks and the real estate market suddenly collapses like it did during the subprime mortgage crisis … you could lose all the money you’ve invested very quickly.

That said, successful investing involves much more than just stock selection. Here are a few other tips on how to invest:

Recognize that perfection in investing is impossible. Not all your investments will be winners. Losses are a normal part of the business. Your goal is to ensure that your profits outweigh your losses, and the best way to do that is to have an investing discipline.

Determine whether you’re dealing with a value stock, as recommended by our Cabot Undervalued Stocks Advisor, or a growth stock, as recommended by Cabot Growth Investor, Cabot Top Ten Trader or Cabot Explorer.

If it’s a growth stock, buy only if the stock’s main trend is still positive. If the news is good but the stock’s behavior is not, trust the stock. Remember that the stock market is always looking ahead, and that your best guide to the company’s future news is what the stock itself is doing today.

In healthy bull markets, remain heavily invested, remembering, again, to ignore the news. In bear markets, hold a large cash position, remembering that capital preservation is goal #1. And remember that bull markets always begin when the economic news is lousy, and bear markets always start when the news is good. Again, the market is looking ahead. So learn to trust stock charts.

Sell your growth stocks in the following circumstances:

  1. a) When the stock’s uptrend ends, as signaled by a substantial high-volume drop below a previous support level
  2. b) When the stock fails to outperform the broad market over a period of 13 weeks
  3. c) When a profit of 100% or more has been cut in half
  4. d) When your loss exceeds 20% in bull markets and 15% in bear markets.

With value stocks, diversification is highly recommended. Because the timing of their advances is unpredictable, holding dozens of value stocks means the average value of your holdings will appreciate over time. Contrarily, with growth stocks, concentration is advised. Five growth stocks can be plenty, particularly if they are in different industries, while 12 growth stocks is probably the maximum you should contemplate.

Lastly, don’t fall in love with your stocks, regardless of how big your profit or how well you think you know the company.

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