h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

As an investor you should buy stocks for the long run but this doesn’t mean that you put them away in a shoe box and forget about them. You need to keep close to information about your stocks and be ready to react. You ought to treat your investment as a business in which you have to pay close attention, and adjust to the market.

As with any worthwhile business you need to keep books that track your performance on a weekly and monthly basis with milestones towards your year end objectives. A spread sheet showing prices per week compared to the index helps show the leaders and laggards. You also need a short list of key indicators on a dashboard, that drive the business forward. Review your successes/failures on a monthly basis with corrective action to close up deviations on the way to year end.

You may consider creating a virtual portfolio to start with choosing and following your companies to get practice. A number of financial sites provide this facility and give you all the advice necessary to get you started. When you’re ready to go live, you can choose an online broker. This will provide you with practically all the tools needed to buy and track your stocks. Like a supermarket it will also reduce your costs, benefitting from massive sales in getting lower trading prices.

Look at the High Street itself - it may help you identify a good stock. You may want to choose a company where either you or someone close to you have first hand knowledge. You then start by making gradual small purchases ramping up gently, giving you time to see how the particular investment is performing.

You can use the Price/Earnings Ratio PER to compare different stocks. If the price is high it could be that people are willing to pay more for quality or future high growth. You can compare the P/E ratio of a stock to its competitors. You can also use the inverse namely the earnings / price as the yield of the stock to give you an idea on how it compares with long term interest rates. With interest rates at say 5% this would be equivalent to a P/E of 20 but you might settle for a P/E of 17 as a middle value to allow for the extra risk in stocks.

There are also mutual funds that cover sectors or the whole index but these are blunt instruments. You cannot move quickly concerning individual shares, you lack flexibility. Mutual funds are good if you want to invest in other markets where you are unlikely to have sufficient knowledge such as foreign stocks or raw materials, gold etc.

If you want to spread your risk you may also consider trackers, which combine the lower risk of mutual funds but are traded as ordinary shares. They may cover a particular sector like pharma or financials etc. You don’t have a fund manager and consequently you do not pay an entry, exit or annual fee.