How to get started with the stock market? [duplicate]
"There's several approaches to the stock market. The first thing you need to do is decide which you're going to take. The first is the case of the standard investor saving money for retirement (or some other long-term goal). He already has a job. He's not really interested in another job. He doesn't want to spend thousands of hours doing research. He should buy mutual funds or similar instruments to build diversified holdings all over the world. He's going to have is money invested for years at a time. He won't earn spectacular amazing awesome returns, but he'll earn solid returns. There will be a few years when he loses money, but he'll recover it just by waiting. The second is the case of the day trader. He attempts to understand ultra-short-term movements in stock prices due to news, rumors, and other things which stem from quirks of the market and the people who trade in it. He buys a stock, and when it's up a fraction of a percent half an hour later, sells it. This is very risky, requires a lot of attention and a good amount of money to work with, and you can lose a lot of money too. The modern day-trader also needs to compete with the ""high-frequency trading"" desks of Wall Street firms, with super-optimized computer networks located a block away from the exchange so that they can make orders faster than the guy two blocks away. I don't recommend this approach at all. The third case is the guy who wants to beat the market. He's got long-term aspirations and vision, but he does a lot more research into individual companies, figures out which are worth buying and which are not, and invests accordingly. (This is how Warren Buffett made it big.) You can make it work, but it's like starting a business: it's a ton of work, requires a good amount of money to get going, and you still risk losing lots of it.  The fourth case is the guy who mostly invests in broad market indexes like #1, but has a little money set aside for the stocks he's researched and likes enough to invest in like #3. He's not going to make money like Warren Buffett, but he may get a little bit of an edge on the rest of the market. If he doesn't, and ends up losing money there instead, the rest of his stocks are still chugging along. The last and stupidest way is to treat it all like magic, buying things without understanding them or a clear plan of what you're going to do with them. You risk losing all your money. (You also risk having it stagnate.) Good to see you want to avoid it. :)" You can try paper trading to sharpen your investing skills(identifying stocks to invest, how much money to allocate and stuff) but nothing compares to getting beaten black and blue in the real world. When virtual money is involved you mayn't care, because you don't loose anything, but when your hard earned money disappears or grows, no paper trading can incite those feelings in you. So there is no guarantee that doing paper trading will make you a better investor, but can help you a lot in terms of learning. Secondly educate yourself on the ways of investing. It is hard work and realize that there is no substitute for hard work. India is a growing economy and your friends maybe safe in the short term but take it from any INVESTOR, not in the long run. And moreover as all economies are recovering from the recession there are ample opportunities to invest money in India both good and bad. Calculate your returns and compare it with your friends maybe a year or two down the lane to compare the returns generated from both sides. Maybe they would come trumps but remember selecting a good investment from a bad investment will surely pay out in the long run.  Not sure what you do not understand what Buffet says. It cannot get more simpler than that. If you can drill those rules into your blood, you mayn't become a billionaire but surely you will make a killing, but in the long run. Read and read as much as you can. Buy books, browse the net. This might help. One more guy like you.
"Index funds can be a very good way to get into the stock market. It's a lot easier, and cheaper, to buy a few shares of an index fund than it is to buy a few shares in hundreds of different companies. An index fund will also generally charge lower fees than an ""actively managed"" mutual fund, where the manager tries to pick which stocks to invest for you. While the actively managed fund might give you better returns (by investing in good companies instead of every company in the index) that doesn't always work out, and the fees can eat away at that advantage. (Stocks, on average, are expected to yield an annual return of 4%, after inflation. Consider that when you see an expense ratio of 1%. Index funds should charge you more like 0.1%-0.3% or so, possibly more if it's an exotic index.) The question is what sort of index you're going to invest in. The Standard and Poor's 500 (S&P 500) is a major index, and if you see someone talking about the performance of a mutual fund or investment strategy, there's a good chance they'll compare it to the return of the S&P 500. Moreover, there are a variety of index funds and exchange-traded funds that offer very good expense ratios (e.g. Vanguard's ETF charges ~0.06%, very cheap!). You can also find some funds which try to get you exposure to the entire world stock market, e.g. Vanguard Total World Stock ETF, NYSE:VT). An index fund is probably the ideal way to start a portfolio - easy, and you get a lot of diversification. Later, when you have more money available, you can consider adding individual stocks or investing in specific sectors or regions. (Someone else suggested Brazil/Russia/Indo-China, or BRICs - having some money invested in that region isn't necessarily a bad idea, but putting all or most of your money in that region would be. If BRICs are more of your portfolio then they are of the world economy, your portfolio isn't balanced. Also, while these countries are experiencing a lot of economic growth, that doesn't always mean that the companies that you own stock in are the ones which will benefit; small businesses and new ventures may make up a significant part of that growth.) Bond funds are useful when you want to diversify your portfolio so that it's not all stocks. There's a bunch of portfolio theory built around asset allocation strategies. The idea is that you should try to maintain a target mix of assets, whatever the market's doing. The basic simplified guideline about investing for retirement says that your portfolio should have (your age)% in bonds (e.g. a 30-year-old should have 30% in bonds, a 50-year-old 50%.) This helps maintain a balance between the volatility of your portfolio (the stock market's ups and downs) and the rate of return: you want to earn money when you can, but when it's almost time to spend it, you don't want a sudden stock market crash to wipe it all out. Bonds help preserve that value (but don't have as nice of a return). The other idea behind asset allocation is that if the market changes - e.g. your stocks go up a lot while your bonds stagnate - you rebalance and buy more bonds. If the stock market subsequently crashes, you move some of your bond money back into stocks. This basically means that you buy low and sell high, just by maintaining your asset allocation. This is generally more reliable than trying to ""time the market"" and move into an asset class before it goes up (and move out before it goes down). Market-timing is just speculation. You get better returns if you guess right, but you get worse returns if you guess wrong. Commodity funds are useful as another way to diversify your portfolio, and can serve as a little bit of protection in case of crisis or inflation. You can buy gold, silver, platinum and palladium ETFs on the stock exchanges. Having a small amount of money in these funds isn't a bad idea, but commodities can be subject to violent price swings! Moreover, a bar of gold doesn't really earn any money (and owning a share of a precious-metals ETF will incur administrative, storage, and insurance costs to boot). A well-run business does earn money. Assuming you're saving for the long haul (retirement or something several decades off) my suggestion for you would be to start by investing most of your money* in index funds to match the total world stock market (with something like the aforementioned NYSE:VT, for instance), a small portion in bonds, and a smaller portion in commodity funds. (For all the negative stuff I've said about market-timing, it's pretty clear that the bond market is very expensive right now, and so are the commodities!) Then, as you do additional research and determine what sort investments are right for you, add new investment money in the places that you think are appropriate - stock funds, bond funds, commodity funds, individual stocks, sector-specific funds, actively managed mutual funds, et cetera - and try to maintain a reasonable asset allocation. Have fun. *(Most of your investment money. You should have a separate fund for emergencies, and don't invest money in stocks if you know you're going need it within the next few years)." I think your premise is slightly flawed. Every investment can add or reduce risk, depending on how it's used. If your ordering above is intended to represent the probability you will lose your principal, then it's roughly right, with caveats. If you buy a long-term government bond and interest rates increase while you're holding it, its value will decrease on the secondary markets. If you need/want to sell it before maturity, you may not recover your principal, and if you hold it, you will probably be subject to erosion of value due to inflation (inflation and interest rates are correlated). Over the short-term, the stock market can be very volatile, and you can suffer large paper losses. But over the long-term (decades), the stock market has beaten inflation. But this is true in aggregate, so, if you want to decrease equity risk, you need to invest in a very diversified portfolio (index mutual funds) and hold the portfolio for a long time. With a strategy like this, the stock market is not that risky over time. Derivatives, if used for their original purpose, can actually reduce volatility (and therefore risk) by reducing both the upside and downside of your other investments. For example, if you sell covered calls on your equity investments, you get an income stream as long as the underlying equities have a value that stays below the strike price. The cost to you is that you are forced to sell the equity at the strike price if its value increases above that. The person on the other side of that transaction loses the price of the call if the equity price doesn't go up, but gets a benefit if it does. In the commodity markets, Southwest Airlines used derivatives (options to buy at a fixed price in the future) on fuel to hedge against increases in fuel prices for years. This way, they added predictability to their cost structure and were able to beat the competition when fuel prices rose. Even had fuel prices dropped to zero, their exposure was limited to the pre-negotiated price of the fuel, which they'd already planned for. On the other hand, if you start doing things like selling uncovered calls, you expose yourself to potentially infinite losses, since there are no caps on how high the price of a stock can go. So it's not possible to say that derivatives as a class of investment are risky per se, because they can be used to reduce risk. I would take hedge funds, as a class, out of your list. You can't generally invest in those unless you have quite a lot of money, and they use strategies that vary widely, many of which are quite risky. I would also be getting out of the stock market if I noticed prices starting to fall and a crash possibly on the way. There are some good and quite simple techniques I would use to time the markets over the medium to long term. I have described some of them in the answer to this question of mine: What are some simple techniques used for Timing the Stock Market over the long term? You could use similar techniques in your investing. And in regards to back-testing DCA to Timing The Markets, I have done that too in my answer to the following question: Investing in low cost index fund — does the timing matter? Timing the Markets wins hand down. In regards to back-testing and the concerns Kent Anderson has brought up, when I back-test a trading strategy, if that strategy is successful, I then forward test it over a year or two to confirm the results. As with back-testing you can sometimes curve fit your criteria too much. By forward testing you are confirming that the strategy is robust over different market conditions. One strategy you can take when the market does start to fall is short selling, as mentioned by some already. I am now short selling using CFDs over the short to medium term as one of my more aggressive strategies. I have a longer term strategy where I do not short, but tighten my stop losses when the market starts to tank. Sometimes my positions will keep going up even though the market as a whole is heading down, and I can make an extra 5% to 10% on these positions before I get taken out. The rare position even continues going up during the whole downturn and when the market starts to recover. So I let the market decide when I get out and when I stay in, I leave my emotions out of it. The best thing you can do is have a written trading plan with all your criteria for getting into the market, your criteria for getting out of the market and your position sizing and risk management incorporated in the plan. "I recommend avoiding trading directly in commodities futures and options.  If you're not prepared to learn a lot about how futures markets and trading works, it will be an experience fraught with pitfalls and lost money – and I am speaking from experience. Looking at stock-exchange listed products is a reasonable approach for an individual investor desiring added diversification for their portfolio.  Still, exercise caution and know what you're buying. It's easy to access many commodity-based exchange-traded funds (ETFs) on North American stock exchanges.  If you already have low-cost access to U.S. markets, consider this option – but be mindful of currency conversion costs, etc. Yet, there is also a European-based company, ETF Securities, headquartered in Jersey, Channel Islands, which offers many exchange-traded funds on European exchanges such as London and Frankfurt.  ETF Securities started in 2003 by first offering a gold commodity exchange-traded fund. I also found the following: London Stock Exchange: Frequently Asked Questions about ETCs.  The LSE ETC FAQ specifically mentions ""ETF Securities"" by name, and addresses questions such as how/where they are regulated, what happens to investments if ""ETF Securities"" were to go bankrupt, etc. I hope this helps, but please, do your own due diligence." "Very simple. You open an account with a broker who will do the trades for you. Then you give the broker orders to buy and sell (and the money to pay for the purchases). That's it. In the old days, you would call on the phone (remember, in all the movies, ""Sell, sell!!!!""? That's how), now every decent broker has an online trading platform. If you don't want to have ""additional value"" and just trade - there are many online discount brokers (ETrade, ScotTrade, TD Ameritrade, and others) who offer pretty cheap trades and provide decent services and access to information. For more fees, you can also get advices and professional management where an investment manager will make the decisions for you (if you have several millions to invest, that is). After you open an account and login, you'll find a big green (usually) button which says ""BUY"". Stocks are traded on exchanges. For example the NYSE and the NASDAQ are the most common US exchanges (there's another one called ""pink sheets"", but its a different kind of animal), there are also stock exchanges in Europe (notably London, Frankfurt, Paris, Moscow) and Asia (notably Hong Kong, Shanghai, Tokyo). Many trading platforms (ETrade, that I use, for example) allow investing on some of those as well." This is a very simple picture book on ***financial statements*** with retard level examples. Shows COGS, SGA and the like. stockbroker is using terms that are on financial statements.   http://www.amazon.com/Financial-Statements-Step-Step-Understanding/dp/1564143414  A good map for you might be to think in terms of Macro and Micro economics. stockbroker is doing micro - analyzing the fundamentals of a business. Macro economics has to do with big issues of a nations  economy like gdp. Both are important. ChrisW's comment may appear flippant, but it illustrates (albeit too briefly) an important fact - there are aspects of investing that begin to look exactly like gambling. In fact, there are expressions which overlap - Game Theory, often used to describe investing behavior, Monte Carlo Simulation, a way of convincing ourselves we can produce a set of possible outcomes for future returns, etc.  You should first invest time. 100 hours reading is a good start. 1000 pounds, Euros, or dollars is a small sum to invest in individual stocks. A round lot is considered 100 shares, so you'd either need to find a stock trading less than 10 pounds, or buy fewer shares. There are a number of reasons a new investor should be steered toward index funds, in the States, ETFs (exchange traded funds) reflect the value of an entire index of stocks. If you feel compelled to get into the market this is the way to go, whether a market near you of a foreign fund, US, or other. "You bring up some very high level stuff, each of which can be the subject of a life's work.  For taxes, I first read J.K. Lasser's Your Income Tax. I actually read it cover to cover instead of using it as a reference guide. I hit topics that I'd otherwise have never looked up on purpose. Once you familiarize yourself with the current tax code, keeping up on changes to the code goes pretty well.  As far as investing goes, William Bernstein has two titles, “The Four Pillars of Investing” and “The Intelligent Asset Allocator”. Others have liked “Personal Finance for Dummies” by Eric Tyson. These are great introductory books, the classic is “Security Analysis” by Graham & Dodd. Warren Buffet was a student of Benjamin Graham and he did fine applying these principals.  For retirement, The Number by Lee Eisenberg was a good read. I consider retirement an extension of the investing education, only the money flow is reversed, withdrawals, no new deposits. Of course this is an oversimplification.  In my own reading list, I include books such as “Extraordinary Popular Delusions & the Madness of Crowds” by Charles MacKay and “The Great Crash 1929″ by John Kenneth Galbraith. Understanding how these bubbles happen is critical to a complete education. I'm convinced that when it comes to investing if I can teach my daughter to understand the concept of Risk and Reward and to understand there are certain common alerts to such bubbles, the simplest of which is the term ""this time is different"" as though a hundred years of market dynamics can change in a matter of a few years.  Last, there are books like ""Stop Acting Rich"" by Dr Thomas Stanley. Not quite investing, per se, but a good read to get an idea of how we have a distorted view of certain signs of wealth.  Keep reading, no harm in taking books out of the library and returning if the first chapter or two disappoints."