A guide to being an educated investor

4 January 19

educated investor

Investing in single stocks can be risky though. That's why we asked our experts for some investing strategy tips:

Do your homework

Knowing a company's product is only the beginning, says Investing for Dummies author Erikc Tiyson.

The next step is looking at a company's financial statements. One place to start is the Value Line Investment Survey, found at most public libraries, which has a summary of all the important measures of a company.

Before making any decisions

Before making any decisions, investors should know a few basics. For instance, asset allocation and its cousin diversification. Asset allocation is dividing investments into asset classes such as stocks, bonds, cash and so on, while diversification is owning a broad range of investments within an asset class.

"The reason you asset allocate is because, by definition, you'll never be in the best performing asset class, but you'll also never be in the worst performing asset class for your whole portfolio," says certified financial planner Ross Levin. "So what asset allocation does is it gives you more consistent returns over time."

Done your homework

Like the company. Now, you want to buy its stock. What's the cost? To keep trading fees to a minimum, go with a discount broker, Erikc says.

"Since you've already done your own homework, you don't want to go to a so-called full-service brokerage firm that's going to charge you a lot more because they have their own research and commission-based brokers," he says.

Online trades typically costs $10 to $20 per transaction.

When to hold and when to fold. "You don't want to sell just because a stock price has gone down," Erikc says. "If stock prices are down, don't be scared out of a bargain. You might actually think about buying some more." Lern more how to get business loans for your investment.

Keep your retirement funds and your single-stock investments separate

 Keep in mind that single stocks should be a small portion of your portfolio. Single-stock investing lacks diversification.

You also don't want to put these investments into your retirement funds. They're too risky, and you lose the opportunity to manage your capital gains tax.

"An individual stock could have tremendous potential, or it could be a washout," Ross says, president of Accredited Investors Inc.

If an individual stock or mutual fund has gone up in price since you bought it, you'll have a capital gain when you sell. If it has gone down, a capital loss.

How do you write those losses off against your taxes?

"The first thing you do is you match all the capital gains you have against all the capital losses that you've had," Ross says. "So all your good investments go up against all your bad investments, and if there's excess loss, then you get to write that off against your ordinary income."

To invest in single stocks, put a small piece of your portfolio - say 10, 20 percent - into a brokerage account and see what you can do. That way, whether the market goes up or down, you'll still have fun.