First off, if you have less than $10,000 available to invest, it may be wise to start out in a low-fee S&P 500 Index Fund (such as the Vanguard 500 - VFINX). This will leave you with a diversified portfolio that closely mimics the overall market. In other words, you won't have to worry about underperforming the market, and since the long-term average market return has beaten any other asset class over the last many decades, this is not just the lazy man's way out, but actually a very sound investment strategy!

If you want to take on more risk with the potential for greater reward, you can try investing in an actively managed mutual fund such as the CGM Focus Fund (CGMFX), which is managed by Ken Heebner and has an extremely impressive performance record - up 54% in 2000 (when the market was down 10%), up 48% in 2001 (market down 13%), down 18% in 2002 (market down more than 23%), up 66% in 2003 (market up 26%). More recently his fund returned over 79% in 2007, a year where the average market returned about 4%!

An actively managed mutual fund like the CGM Focus Fund will not offer you the same amount of diversification as an index fund (I'll explain why diversification is so important later), but being actively managed by an experienced and high quality manager makes it a smart move for young investors who don't mind taking on a little more risk for the potentially significant reward over the long term. Because a managed fund is only as good as its manager, the only homework you need to do with an actively managed mutual fund is to make sure that the fund manager hasn't left or been replaced!


So, you're ready to trade individual stocks...

If you have at least $10,000 and want to actively trade individual stocks, you need to begin by watching the market for at least a few months. Setup an account with a discount online brokerage (typically charging $5 - $10 per trade) such as TDAmeritrade, E*Trade, Charles Schwab, or ScotTrade and familiarize yourself with their tools. There are alternatives that offer lower commissions per trade ($1 - $3 per trade), but they likely won't offer the same quality or quantity of research tools. For low commission trading without all the nifty bells and whistles, visit Interactive Brokers.

Create a model portfolio or watch list before you start playing with your own money. Remember that downside protection is the most important thing you can do for yourself. If you can successfully limit your losses, the upside will take care of itself. Now, for some basic rules that should help you become a better investor...

Diversification. In other words, don't keep all of your eggs in one basket! This will help protect you from sudden steep losses, so try to pick at least 4 or 5 different stocks in efforts to evenly distribute your risk across different sectors of the economy. Even if you know one sector is absolutely on fire, you need to keep your money spread around in different sectors in case that hot sector falls out of favor. Diversification will substantially limit your downside. Even so, there is a practical limit for the individual investor. Try not to get involved with more than 10 stocks, as doing so will make it very difficult to stay up to date on the news affecting each of your positions, which is absolutely necessary in order to make timely decisions.

An example of a Diversified Portfolio:

• mineral/mining - Agnico-Eagle Mines (AEM)
  
• oil/energy - Transocean (RIG)
  
• agricultural - Deere & Co' (DE)
  
• consumer staples - Protctor & Gamble (PG)
  
• telecommunications - AT&T (T)
  
• technology - Microsoft (MSFT)
  
• healthcare - St. Jude Medical (STJ)
  
• defence - Lockheed Martin (LMT)

Do your Homework. For each stock you currently own or are about to purchase, you can expect to spend at least one hour per week keeping up to date on general news, press releases, quarterly and annual reports, conference calls, etc. The markets move fast, so you need to stay up to date. If you don't have the time to do this, hand your money over to an actively managed mutual fund or index fund, where you can still reap the rewards of the best long-term asset class currently available, without the stress and time requirement of managing your own money.

Only own stocks that you can understand. Don't buy into hype, instead develop a thesis for why you believe the company or sector you are investing in will do better than expected in the future, as well as what will help protect you from losing money (such as quarterly dividends and stock buy backs). If you don't know how a company makes its money, you won't know how to react to breaking news. Make sure you can understand what it is that your company does, and recognize the downside risk.

Learn how to read a balance sheet. Every company trading on a major US exchange will provide public financial documents such as their balance sheet, which will provide valuable information regarding the health of the company in question. Do your best to avoid companies that are loaded down with debt. Look for companies that have no debt, or are actively paying down their debt, and are increasing revenues and earnings. Most online brokers will conveniently provide this data for you, but you can also find what you need at http://www.sec.gov

Once you decide to invest in a specific stock, never buy all at once. Everyone will make mistakes. You want to scale into positions slowly over time, so that you can take advantage of when the market drops. In similar fashion, you want to scale out of your positions by selling over time as the stock continues to appreciate in value, thereby protecting your downside by locking in profits just in case there should be an unexpected drop on the horizon (which you could then consider using as an opportunity to buy back the stock at a lower price).

Don't turn a trade into an investment. If you buy a stock for a specific catalyst (such as an expected new product announcement, takeover, merger approval, drug approval, etc), don't turn that trade into an investment by holding onto it if your catalyst does not pan out. Learn to recognize which trades you are considering for short-term catalysts, and which investments you are considering for their long term growth potential. Stick with your original plan and don't be afraid to sell at a loss if things are not playing out the way you had anticipated. There is no sense in hoping that a stock will come back up, not all stocks will recover, and some will even go to $0.

Always keep cash on hand - Never keep yourself fully invested! This was the biggest mistake I made in the beginning of my trading career. If you keep all of your cash committed, you are basically saying that you don't believe the market can drop from this point. With no cash on the sidelines, you can't take advantage of buying your favorite stocks on sale when the market turns negative! Try to keep at least 10% of your portfolio (the money you have for investing) in cash, so that you can put it to work when there are unexpected drops in the market. If the market has taken an unusually strong positive advance, start selling the stocks that have gone up the most, because there will eventually be a pullback.

Mind you, I'm not a professional, but I have been at this for a few years now and I feel that I am getting a better handle on it with each additional day of experience - it is not easy. The market is very difficult right now, and though I had a handsome 24% gain in 2007, I have been bleeding money in 2008 and underperforming the market so far this year. Be very cautious, and if you want to put some money on the line as you teach yourself about the market, do it through an S&P 500 index fund as I first mentioned in this post.

I will use the remainder of this thread to keep you updated on stocks I am eyeing, and the moves I am making with my own money. So feel free to follow along, and I welcome any suggestions or concerns you may have about any statements I make. It is through criticism and subsequent analysis, that I aim to become a better investor.

• Suggested reading for stock trading: Jim Cramer's Real Money (read it online with Google Books)
  
• Also see: How to Retire Richly - [a discussion of 401(k), IRA, and Roth IRA retirement accounts]

• St. Jude Medical (STJ) - Currently Trading @ $40.25 / share
  
  Develops, manufactures, and distributes cardiovascular medical devices. The principle products produced are tachycardia implantable cardioverter defibrillator systems (ICDs) and bradycardia pacemaker systems (pacemakers); mechanical and tissue heart valves and valve repair products; neurostimulation devices; closure devices, guidewires, hemostasis introducers and other interventional cardiology products, and electrophysiology (EP) introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.
  
  
  
  
• Schering-Plough Corp (SGP) - Currently Trading @ $26.70 / share
  
  A global science-based health care company with prescription, consumer and animal health products. Schering-Plough has three segments: Prescription Pharmaceuticals, Consumer Health Care and Animal Health. The Prescription Pharmaceuticals segment discovers, develops, manufactures and markets human pharmaceutical products. The Consumer Health Care segment develops, manufactures and markets over-the-counter (OTC), foot care and sun care products. The Animal Health segment discovers, develops, manufactures and markets animal health products. In November 2007, the Company completes acquisition of Organon BioSciences N.V. from Akzo Nobel N.V. This acquisition should help SGP generate above-average earnings growth over the coming year.
  
  
  
  
• CVS Caremark (CVS) - Currently Trading @ $36.50
  
  Operates in the retail drugstore industry in the United States. As of December 30, 2006, the Company operated 6,202 retail and specialty pharmacy stores in 43 states and the District of Columbia. The Company operates in two segments: Retail Pharmacy and Pharmacy Benefit Management (PBM). The Company sells prescription drugs and an assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods, through its CVS/pharmacy retail stores. The PBM business provides a range of prescription benefit management services to managed care and other organizations. In March 2007, CVS Corporation completed the acquisition of Caremark Rx Inc. The combined company is named CVS/Caremark Corporation.
  
  This one is special, as numbers came out this morning that have showed lower than expected "same store sales growth" - which is the key metric in evaluating companies that operate retail stores. It has been particularly hard hit on the news, as soft numbers also came out for Walgreen and Rite Aid... and CVS is down over 7% this afternoon. The best news here, is the Caremark Pharmacy Benefit Management acquisition, which should set it apart from the other retail drug stores. As more drugs come off patent and generic equivalents are made available, CVS Caremark will make higher profits on the sales of those generics than they would have made for the name brand drugs. Here is the research that caught my attention:

  "Despite a slow start to the flu season, [CVS] will very likely see strong
  demand on the retail side in this area over the next couple of months. More
  and more prescriptions are also moving over to generic alternatives, which
  carry higher margins for CVS. Finally, slower retail sales will not affect
  the secular growth of the company's pharmacy benefits management arm,
  Caremark. And rather than paying 25 times expected 2008 earnings for
  similar businesses like Express Scripts (ESRX) and Medco Health (MHS), we
  can get the same business embedded in CVS Caremark at 16 times next year's
  expected profits."