Stock Investment Prerequisites — Out Best Investment Advice To You

You've done your due diligence. You've absorbed the basics of stock investing. You feel ready to dive into the world of stock investing.

You've done your due diligence. You've absorbed the basics of stock investing. You still feel nervous and unsure about stock investing.

These are two common scenarios most people face at this point.

The best investment advice we can give you is, "Hold on! Take a deep breath and go over this brief list of prerequisites first."

It's absolutely essential for your long term investing success that you make sure you've taken these steps first. Failure to do so will only drag down your performance.

Stock Investment Prerequisites

Before you take that first step, there are certain barriers that you have to break down. Here's our recommendation on how to go about this:

• Consumer Debt: Consumer debt is typically is credit card debt or high interest loans. This kind of debt with an interest rate north of 18% needs to be dealt with first and foremost.

  Why? A rate of return of 15% every year on your stock investments is considered very good. But if you still have credit card debt demanding more than 18% interest, in essence, you're losing 3% every year... compounded!

  Bottom line.... if you have the money, pay off this expensive debt first instead of using that money to invest in stocks.

  How about debt with lower interest rates, say 4-5%? It's going to take you some time to gain experience investing in stocks and making decent returns. If you have enough experience and a decent track record, you can actually use some of your available finances towards buying stock.

  From a "peace of mind" perspective though, it's always good to pay off these kinds of debt first.

• Emergency Fund: You want to make sure you have money saved up for emergencies like unforeseen medical care, living expenses in case of a job loss, etc.

  How big should this fund be? That depends on where you live, how long you think you would be able to get another job if you lose your current one, how much you currently spend, and such considerations. You are the best person to make this call. You should go with a minimum of at least six months of living expenses.

  This money is sacred — to be used in real emergencies only.

• Overcoming your fear: This is probably the biggest barrier for beginning stock investors. The stock market can be a really scary and intimidating place. Turn on any business TV channel and you are bound to hear terms you've never heard before.

  Relax! As long as you stick to what you know, control your emotions, and make your own, independent decisions you will do much better than most investors.

  So how do you address this "fear factor"? Paper trade first.

  Paper trading means simulating your stock transactions. So you would use paper and pencil or a computer to record your stock transactions. You won't be using real money at this point ... just imaginary money.

  So pick an amount to start with... say $10,000. Do your research like you would if you were actually using $10,000 to invest. Decide which stock and how much you want to buy. Check the market rate you buy it at. Record your transaction.

  Use your imaginary $10,000 to pick great stocks following the fundamentals we've covered. This is your imaginary portfolio. Watch it from now on till you're done paper trading.

  Doing this gives you hands-on experience with stock investing.

  How long should you paper trade? As long as it takes for you to feel confident. Some days you will see your portfolio nose-dive, some days it will rocket up. These gyrations should help surface emotions of panic or euphoria as the case may be.

  It is very important that you don't act (buy or sell) based on these emotions. It's good to experience these before you have real money in the market. It will help you deal with them when you're actually investing.

  Even if you're not nervous about taking that first step, paper trading serves as "training wheels" and you should try it for a bit first.

• How much to start with? When you're just getting started, the money you invest in the stock market should be money you can live without. There are two reasons we say this....

  First, in order for you to see your money grow, you have to give it some time to appreciate. So your money might need to be locked in for sometime.

  Second, no matter how much research you do, or how attractive your purchase price is, you will lose money occasionally. It happens to even the best investors.

  So consider the above two factors when deciding how much money you should start with.

• Make a watch list: As you screen stocks and estimate how much they should trade for, you need a put these companies in a list. You also need some kind of notification once the stock price approaches your target.

  A watch list is a convenient way to achieve this. Our Stock Charts page covers some websites that can help you set up a watch list in addition to viewing charts.

In summary, the best investment advice we can give you before you get into stock investing is to make sure you follow some basic prerequisites — eliminate consumer debt, build your emergency fund, paper trade first, invest with money you can afford to see decline in value, and build a good watch list.

Following these basic steps will give you a great start into the exciting world of stock investing.

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