Part I - An Introduction to Smart Stock Investing And First Steps For the Newbie Investor
I started investing in stocks over a year and a half ago just when the market was beginning to come down and a few months before the whole sub prime mortgage crisis reared its gruesome head.
At the time I knew very little about the stock market and I knew even less about the businesses that I thought about investing in, so instead of making the heart wrenching choice of what stocks to buy myself, I had my father, a long time veteran, do the decision making for me. Since then I’ve begun to venture out and make my own decisions. Some good, some not so good, but all around I’ve learned quite a bit.
For those of you who are looking to invest some money or are already invested in an IRA or 401K account but are looking to understand more about smart stock investing, this series is for you.
Smart stock investing for young people, is different than smart investing for middle aged or elderly people, because young people tend to spend more. Young professionals in their 20s and even early 30s, before marriage, tend to spend a high percentage of their monthly paycheck on things such as entertainment and food.
Here’s an article from the Washington Post that I would recommend reading; it’s dated Feburary 3rd, 2008, entitled They Work Hard, They Play Hard, But They Don’t Realize the Cost.”
It’s about young professionals spending hundreds of dollars on entertainment and not even realizing it. If you find yourself often wondering where all your money goes every month you’re not the only one!
The definition of young is a pretty arbitrary one, some would say anyone in their 20s, while some would extend that into the 30s and perhaps into early 40s, but for the purposes of this article, my definiton of “young” is a person who has no family or dependents. People who have no dependents tend to spend more lavishly, because they can afford to. However, as I mentioned in my series How to Get Rich With Patience, saving smartly is one of the key components to long term wealth building.
The second crucial component to getting rich or wealth building is smart investing. Hence the title, smart stock investing. 
What is Smart Stock Investing?
Smart stock investing is investing that minimizes losses and maximizes gain. This is an idea that legendary investor Benjamin Graham introduces in The Intelligent Investor , one of his seminal works on investing. If you want to learn about smart stock investing, here’s a place that most credible sources will advise you to start. Since it’s a bit dry for the first time investor, I will introduce in this series the key concepts of the book while using my own experiences with investing to illustrate the points more concretely.
Graham, a mentor of the legendary investor Warren E. Buffet, presents two categories of people who invest in stocks: investors and speculators. Investors, according to his definition, are people who invest in businesses for the long term without needing to constantly monitoring the company’s stock price; speculators, on the other hand, are people who buy or sell a stock based on its price at the moment; they buy as the price rises and sell when it begins to fall.
Speculators trade for short term gains, while investors invest for long term gains.
The reason I entitled this post Smart Stock Investing For Young People is because, like Graham, I want to distinguish between true investing and speculation or trading. The word investor is often used to describe anyone who puts money into a venture, be it in real estate, a stock or a small business. According to this definition, day traders and speculators can also be considered investors.
While some may consider speculators and traders investors, by our definiton, they are not smart investors.
Before I delve into steps to take for the newbie investor, let me explain three reasons why I it makes sense to be a smart stock investor and not just any day trader or speculator.
Reasons for Wanting to Be a Smart Stock Investor
1. Your investments will be rational and based on analysis and logic.
If you want to speculate, you might as well go to Atlantic City or Las Vegas, at least there you will be entertained for your money. Smart stock investing is about doing research and making sound investment decisions based on careful analysis. You will be putting your money in companies that you have studied carefully and believe will do well in the long term, which will make it easier for you to sleep at night.
2. Over time you will get better at identifying good investments from bad ones.
Smart Stock Investing is a discipline that requires constant practice; while it takes a lot of work, the more you put in the better you get. Smart stock investing is like shooting at a specific target, while speculation is akin to shooting with a blindfold on. Your goal is the same, but your methods are completely different.
3. Warren Buffet is a Smart Stock Investor and he’s the richest man in the world. No explanation necessary.
Typical Excuses For The Investing Illiterate
Whenever I try to talk to my friends, those who don’t already invest, about investing they usually give me one of the following three responses:
1. It’s too hard.
2. I don’t want to lose my money.
3. I don’t know where to begin!
Here are my responses:
1. Smart stock investing is hard, but so is working, exercising and anything else that’s beneficial in life.
2. You will minimize your losses and maximize your gains if you learn to invest smartly.
3. Three Words: Friends, Library and Internet.
How to get started as a Smart Stock Investor
When I first started investing, I gave my father my $10,000 in savings and told him, “Okay dad, tell me what to do with it.” While that probably wasn’t the smartest idea, it definitely helped get my feet wet. Once I purchased those stocks, my money was locked in and I became emotionally as well as financially invested.
I tracked my stocks every day and developed the habit of reading financial news and statements. With each new development, I learned more about the pros and cons of my investment and I also began to develop new ideas for future investments.
Tip 1: Start Now
There’s never really a good time to invest, especially if you know nothing. If you’re like me, and I think many young people today are, you probably have the attention span of a three year old. Personally, I am all about the jump-in-the-deep-end approach. That’s how I learned to swim and that’s how I began my journey towards becoming a smart stock investor.
Tip 2: Pick a Cheap Online Stock Broker
Rather than regurgitating information that I know is on the Internet, let me refer you to an article by The Motley Fool a top notch website full of information about investing. I highly recommend their articles and I even suscribe to one of their monthly newsletters.
Tip 3: Set aside 10% of Your Next Paycheck
In order to get started, you need some money to work with. Whether you’re in college or in the working world, you probably have some extra spending money each month after all your bills are paid. Take some of that money, I would recommend 10% at the least, and set it aside for investing. You don’t want to invest too much right away because you’re just getting started, but you also don’t want to invest too little, because then you may have less incentive to sharpen your investing skills.
The idea is put yourself in a situtaion where you will be emotionally and mentally invested in your money. I know how easy it is to get distracted by life, work and the Internet, which is why investing not only your money, but your mind and emotions as well is important.
Tip 4: Do Your Research!
Your first investment should be in a company that you feel attached to. For example, if you really like drinking Coca Cola, think about making your investment in The Coca Cola Company. One of the keys to smart stock investing is understanding your circle of competence, a phrase which Warren Buffet uses a lot. Basically it means that you should only invest in businesses that you understand reasonably well and avoid ones you don’t.
If you don’t understand the business you invest in, you won’t be able to tell whether a recent surge in stock price is reflective of improved business or whether it’s caused by speculation. Since you’re going to invest your hard earned money in a company, a Smart Stock Investor would make sure they know their business inside and out.
If you were going to invest in Coca Cola, here are some of the things a Smart Stock Investor would do:
1. Check out Coca Cola’s website and read up on their recent news.
2. Look into the different products that Coca Cola produces. They make much, much more than just Coke; find out what they are and how well those products are doing.
3. If you’re adventurous and like numbers, check out their financial statements, at Coca Cola’s investor relations website and click on SEC Filings. Click around and read their latest annual report, also known as the 10-K.
Note: Reading financial statements is crucial to smart stock investing, but in the beginning this step may be too much for the new investor, especially if you don’t like numbers! 
Tip 5: Purchase Shares
Once you’ve done the research and feel pretty good about the company, it’s time to invest. Log into your online broker’s website and go to the Stock Trading page and type in the stock’s ticker symbol. It’s usually a four letter symbol representing the stock, if you’re not sure go to Google Finance and type in your company’s name and the ticker symbol will come up.
Check the price of the stock before you make the transaction. If you divide the amount of money you will invest by the price of the stock, that will give you how many shares you can buy. For example, If I have $1000 to invest and one share of Coca Cola is $50, I can buy 20 shares.
Since this is your first stock purchase, I wouldn’t worry so much about the price; unless you have a very good feeling it will go down in the near future, trying to time the stock price to get in at the lowest point is more work than it’s worth.
Note on Commissions
Whenever you buy a stock, your broker will charge a commision fee. Usually it’s around $10, sometimes more and sometimes less. These fees can add up; so it is better to buy 20 shares at once rather than 10 shares now and 10 shares later.
Well if you’ve made it past this stage, congratulations you are now on your way to becoming a Smart Stock Investor; and hopefully a wealthy one too!
Stay tuned for Smart Stock Investing For Young People Part II !
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