Ask Stacy: How Do I Invest in the Stock Market?

This week’s question concerns investing:

I would like to invest in the stock market, preferably in copper. But I don’t know how to do it. Is there like a crash course on investing in the stock market you could point me to? Thanks. – Louise

First lesson: Don’t ever put the words “stock market” and “crash” in the same sentence.

Just kidding.

I get beginning investment questions a lot. So let’s start with a video I did several months ago that will help to answer Louise’s question before we discuss the specifics involved. It’s called “Things Beginning Investors Need to Know.”

Now, a quick recap of those rules:

Rule No. 1: Long-term money only

When it comes to stocks, the longer your investment horizon, the lower the risk. Day trading is risky because nobody knows what’s going to happen on any given day. Investing over decades carries far less risk, because quality companies become more valuable over time, and so do their shares.

That’s why you should never put money in stocks you’ll need within five years, minimum.

Rule No. 2: Moderation

Because the stock market is risky, it’s not the basket for all your eggs. In the video above, I suggest subtracting your age from 100, and putting no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings. But as I also said, that’s just a rule of thumb. If you’re nervous, you’ve invested too much.

Rule No. 3: Use mutual funds

I like buying individual stocks (you can see my online portfolio here) but it’s not necessary or, for most people, advisable. You can do perfectly well with a mutual fund, while at the same time lowering your risk and reducing your hassle.

What’s a mutual fund? A giant pool of investments. It could be a pool of stocks – a stock fund. It could be a pool of bonds — a bond fund. Or it could have both stocks and bonds – a balanced fund.

The appeal of mutual funds is threefold:

  • A mutual fund allows you to spread the inherent risk of stock investing by diversifying among a bunch of stocks instead of investing in just a few.
  • Mutual funds have professionals who do the buying and selling.
  • Mutual funds keep track of a lot of the paperwork for you.

Growing in popularity is another type of mutual fund known as an exchange traded fund or ETF. As the name implies, they’re mutual funds that trade on exchanges like stocks.

Rule No. 4: No trying to time the market

Try to time the market and you’ll likely find yourself on the sidelines when the market takes off — and over-invested when it crashes. The best way to approach stocks is also the simplest — dollar cost averaging, also known as systematic investing. All you have to do is invest fixed amounts, like $100, at regular intervals, such as monthly. This method works for a simple reason: It automatically buys more shares when they’re cheap, and fewer when they’re not.

That’s the basics for beginners. Now let’s get specific by answering Louise’s question.

Anatomy of a trade: Investing in copper

If you look at my portfolio, you’ll note that I own a stock called Freeport-McMoRan Copper & Gold, which I bought in 2009. This company is one of the world’s largest copper producers. Explaining how I came to buy it should help illustrate the process I use to buy stocks.

Let’s start with the basics – why I bought a copper stock in 2009.

Copper is known as a barometer for the overall economy. When the economy is in a down cycle, less copper is used, prices drop and copper producers suffer. When the economy is in an up cycle, copper prices rise, miners are more profitable and their shares tend to rise.

This is why companies like copper miners, steel producers and automakers are known as “cyclical” stocks. You want to buy them when times are tough – 2009 would certainly fit that bill – and sell them at the top of the economic cycle when times are good.

How did I know all this? I learned it as a stockbroker, I’ve read it in various investment books, and I’ve heard it many times from experts on TV and elsewhere.

Look, listen, learn, leap

When the economy was tanking in 2008-2009, I was glued to the tube and the Web. I was watching and reading everything I could for two reasons: First, I was worried about stocks I already owned, and second, I was on the lookout for stocks to buy as the market cratered.

Back then I watched a lot of CNBC, including shows like “Fast Money” and “Mad Money.” I also surfed lots of sites, like MSN Money, Yahoo Finance, TheStreet.com and others. When I heard about a stock that seemed to make sense, I’d learn more about it. For example, for research on Freeport, I might have gone here on MSN Money, here on TheStreet.com or here on Yahoo Finance. I also get free research from my online brokerage firm, Vanguard.

If I were just interested in learning about copper, I might also have simply searched the word “copper” on those various investment sites, then read the articles that came up.

Once I’d satisfied myself that I had the right strategy (for example, buying cyclicals) and the right stock (for example, Freeport), I pulled the trigger.

In order to buy a stock, you’ve got to have a brokerage account. Opening one is no big deal. It’s basically like creating an online bank account: Fill out a few online forms, send in some money, and you’re ready to rock. Once you’ve established your account, you can buy stocks online simply by putting in the symbol and number of shares, then clicking “buy.” Most brokerages also provide live support, however, if you need it.

As I’ve said, I use Vanguard, but there are lots of online brokerages. To pick one, you might do a search for “online brokerage reviews.” Pay attention to transaction costs (commissions or fees to buy stocks) and how well the service is ranked.

What about mutual funds?

Buying the stock of a copper producer is one way to invest in copper, but not the only way. As I mentioned above, for small investors, mutual funds and ETFs are often preferable to individual stocks.

So how would you find a mutual fund that invests in copper? Simple: with a Web search. By putting the phrase “mutual funds that invest in copper” in a search engine, I found links to articles like “How to Invest in Copper” on About.com and “3 Plays to Re-Mount the Copper Bull” at Investorplace.com. Both articles suggest mutual funds that specialize in copper.

Another thing you might do, once you open a brokerage account, is simply call and ask them for suggestions. Vanguard, for example, has the Vanguard Materials ETF. While it’s not a pure copper play, it does have copper-related stocks (including Freeport McMoRan) as well as companies that produce aluminum, steel, paper and chemicals.

Just do it

I’ve been buying individual stocks for 35 years so I don’t remember the trepidation I must have felt at first. But one thing’s for sure: The more you know, the less you’ll fear.

When I started down this path, there were only two ways to learn this stuff – reading books and talking to those with more experience. These days, there’s a ton of free information out there. There are online investment clubs, websites, TV shows, radio shows, brokerage firms – everything you could possibly need to become an informed investor.

It may not be the right time to invest in copper, and I’d rather see Louise in something more diversified and less volatile. And she probably needs to do a lot more reading before she invests.

All those things are true, but so is this: You can’t get a hit from the dugout.

Got a money-related question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here.

The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

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