Know what you are investing in. It is imperative that before you begin buying stocks, you do your research. Please feel free to read the article by me titled "How to Know When to Buy a Stock". Doing proper and efficient research is essential to make a profit in the stock market. If you do not have an hour or more per week to keep up with your investments, then I would strongly recommend buy a mutual fund. A mutual fund is basically a collection of stocks managed by a certified and proven group of professionals. But if you are like me, then you will want to be in charge of your own money.
Diversify! There are many different strategies used to diversify investments. But first you must decide how much money you will be investing in stocks. It is never too early to begin investing (I started with $150!), but I would say that $2,500 is good minimum amount to begin with if you cannot come up with more than that. Now comes the diversification part. My personal recommendation to individual investors, and that of many experts, is to own between five and ten different stocks. So if you had $2,500, you could put $500 in five different stocks, thus being diversified.
The Meat of the article. There are two extremely important things to remember when diversifying: Vary the risk of your stocks, and vary your stocks by industry or even by geography. First of all, risk. The greater the risk of the stocks you own, the greater the possibility that you will achieve great profits, or losses, in your portfolio. That is why it is so important that you effectively manage the risk level of your investments. To do this involves varying your stocks by industry, by geography, and by size. A few examples: If you own five different stocks. Let's say Apple, IBM, Dell, Intel, and Texas Instruments. Obviously each of those five companies are primarily involved with the computer business. Now, if something crazy were to happen to the computer business that hurt those companies, then their stock prices would all go down and you would lose a lot of money. Now, let's say the five stocks you own are Apple, Exxon, Disney, Walmart, and Pepsi. If something happened to the computer business, you would be okay, because you only have one stock that would take a hit. This is the essence of diversification. So that is how to diversify by industry. But diversifying by geography is also important. A good rule of thumb could be to have 20% of your portfolio in overseas markets like Europe, China, or Latin America. Any 'emerging market', which includes companies in countries like China, Brazil, Russia, etc., is considered risky. You always want to have a little bit of your money in a more risky stock, because there is a chance that it will go up a lot. Now there is diversifying by size. Smaller companies are considered more risky, while bigger companies are considered more safe. Its also good to have a little bit of money invested in a smaller company. Now that you know what to do, go do it!
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