A Mother's Advice: How to Start Investing

My dad was a milkman who knew more about union halls than investment strategies, And then he died before I learned to add, much less multiply, so it didn't matter anyway. My mom knew how to stock a pantry and bond with her kids. But she only invested in flour and yeast for the inordinately large amounts of bread she baked.

I didn't listen to my uncle, the one person in my blue-collar family who knew anything about investing. It wasn't because he was wrong. He was just the most unpleasant man I ever met (and, I've come to believe, he was just plain nuts).

I learned everything I know about the markets from trial and error, barroom conversations, and a desire to avoid that sinking feeling you get when you open the quarterly statement from a misguided investment.

If I knew then what I know now, I'd have more money and less stuff. I'd have invested in companies -- stocks, bonds, and mutual funds -- instead of the things they made... betamax, Mi, niDiscs, LaserDiscs, recordable DVD players, and other so-called next big things. I acquired a lot of stuff, and tossed most of it before it gained value as an oddity.

But then I had kids. And once you have kids, two things happen: You discover investing is a wonderful thing because it reduces the money you're likely to spend on the cheaply made toys that drive you crazy. You also spend a great deal of time thinking of ways to teach your children all the things you never knew, in the hope of sparing them some of your mistakes.

So here's what I'd like my kids to know about investing.

1. Don't be afraid. You date people you'll be embarrassed to acknowledge in five years, risk a cold (or worse) playing beer pong with strangers, and think it's fun to skydive, bungee jump, or repel off a bridge at 3 a.m. So what do you have to fear from the stock market? You have decades until retirement, little or no responsibility, and more disposable income than you'll probably have in years. So go for it!
2. Embrace what you love. Youth, an old man complains in It's a Wonderful Life, is wasted on the young. And here's why: You have a unique perspective on products and services that most investors, who are old by comparison, understand only through market research. So when you start thinking about investing, start thinking about the things you do, the places you go, and the clothes and accessories you wear. What's new? What's interesting? What looks to be something everyone wants? Just make a list. Then find out which ones are made by publicly traded companies, and you'll be on your way to your first investments.
3. Dare to compare. Take those five or six public companies on your list and ask yourself a simple question: Which one (or two or three) has the greatest potential to generate a return so you can 1) travel; 2) play; 3) zone out; or 4) avoid getting a part-time job? When you look at the potential benefit, you won't feel as daunted when I tell you to spend a few hours checking out any of the companies on your shortlist.
4. Get under the hood. To research a company, you have to know what to look for. So do a little digging around. Our Guide to Investment Metrics is a good place to start. Once you understand what to look for, then look up the statistics for each company. It's not hard. In fact, WolframAlpha makes it as easy as entering the name of a company or its stock symbol and hitting "submit." You'll get fundamentals, stock history, even an understanding of whether analysts think it's a good time to buy the company's stock.
5. Size doesn't matter. Say you just have $50. Is it too little to invest? Not necessarily. Some companies offer Dividend Reinvestment Plans (DRPs) or Direct Stock Purchase Plans (DSPs), which allow you to bypass paying the broker's commission and buy stock directly from the issuing companies or their agents. Not all companies offer them. But more than 1,000 do, including most major blue chip stocks. If that's not an option, then look into a discount brokerage account. Some offer first-time bonuses of $50 or more, which will cover the $10 or so you'll have to pay in commission.
6. Diversity is good. If you have enough to invest in more than one company, then spread your wealth around. Pick several companies from various sectors: technology, apparel, food and beverages, whatever. You don't want to put all your money in one industry, no matter how much you love it.
7. Set a target. Once you narrow your choices, look at the stock prices. Say a share is selling for $10. Decide -- before you buy -- when you'll sell it. There are all kinds of technical tools you can use to set a sell price. (See Understanding Stops, Targets & Total Risk.) But you can always start with something simple: Promise yourself you'll sell when the share price increases by a certain amount, 25% or 50%, perhaps. Just pick a target, and then stick with it. Because remember: Even great products peak. The goal is to get out before they fall.
8. Have fun. Do I have to remind you that you're young? Worried you might screw up? So what. You'll recover. You'll learn. You'll gain insight and experience. The market goes up and down, and eventually, just when you're convinced it won't, back up again. You'll make money over time. But the market is like the lottery. You have to be in it to win it.