Ready to invest? Set up your emergency money reserve, take care of consumer debt and learn the basics. An easy entry is to start small.

Understand the Stock Landscape

Q&A: Mastering the Stock Market: 101

By Ben Myers. eHow

Before jumping into the market a new investor should determine their own investing style. This includes careful consideration of your personal goals, risk tolerance and expectations. Piecing together your own portfolio can get you more involved with your investments.

eHow spoke with personal finance writer Eric Tyson, author of Personal Finance for Dummies and Investing for Dummies, about knowing when youre ready to invest, common mistakes made and how to buy and sell individual shares and mutual funds.

eHow: How do you know youre ready to invest in stocks?

Eric Tyson: If someone doesnt have an emergency reserve of money, they shouldnt be investing. They probably also shouldnt be doing it if they have consumer debt. There can be exceptions to that rule. For example, if you have a 401(k) plan and your employer will match your contribution. In a typical 401(k), you are generally constrained by the investment options the employer offers. They are typically mutual funds. But theres more potential for something to go wrong if you’re doing investments on your own. The mistakes Ive seen people make over the years generally stem from people not doing their homework before they make a decision.

eHow: What are common mistakes new investors make?

eHow: Is it unwise to start buying stocks without an overall financial plan?

ET: It makes sense to come up with an overall plan to begin with. The plan can evolve; its not cast in stone. Do an inventory of your financial assets and liabilities. Otherwise you are shooting in the dark. Most people have a longer-term goal of being able to cut back on work or retire. That defines a subset of investments that you can invest in if youve got a long-term horizon of decades, rather than just months or years. In that case, you can choose investments that are riskier in the short term.

eHow: How do you physically start buying and selling stocks, both with individual shares and with mutual funds?

ET: You generally need to go through a broker to buy shares of stock in an individual company. There are a lot of so-called discount brokers where you can buy and sell online for less than $10. The thing to consider is what if any advice you want. A lot of online brokers are not set up to provide advice. But unlike the early discount brokers, a lot of the discount brokers today provide research and information. Be aware of the fee schedule for all the different services. People might be focused on the $6.75 trading commission fee and not realize theyll be whacked for $20 if they need to get a check cut from their account.

With a traditional firm like a Merrill Lynch, understand how their compensation system works and how it may skew recommendations.

The other way more people are buying shares of stocks in many companies is through a diversified mutual fund. The bigger mutual fund companies like Vanguard and Fidelity sell their mutual funds direct to the public, so you just have to set up an account.

eHow: How do you know if your stocks are performing well?

ET: Ultimately youve got to compare the performance of your investments to common benchmarks or indexes. With mutual funds it can be an index fund of the S&P 500. Or it could be a total stock market index fund. Over the long term, a highly diversified index fund ends up beating most actively managed funds. Some people want to pick individual stocks. If you want to do that with a portion of your portfolio for the fun or educational value, fine; but do you really think youll beat the market averages of the best professional money managers? Probably not.

eHow: Is there a universal strategy for different levels of investors?

ET: Mutual funds are available regardless of how much money you have. Some mutual funds have higher minimums, but the good news for those with less money is they can tap into a lot of the best investments an affluent person can. An affluent person can look at private money managers and hedge funds. But you have to be careful there because you dont have the same type of SEC oversight, and you dont necessarily have audited performance returns. Look at the people who lost billions of dollars with Bernie Madoff. If you put your money in a mutual fund, you know they arent going to abscond with your money and that their returns havent been fabricated.

eHow: Are there any traps to avoid with mutual funds?

ET: With an index fund, where you are tracking a broad market index, fees really matter. If its tracking the broad market index, assuming its tracking it properly, then you are going to get higher returns the lower the fees are. For actively managed funds, look at the track record of the fund manager and the fund management company. If a fund is handicapped by relatively high fees, that is going to undermine its future performance. Its good to find a manager who has a great track record. If you’re in a diversified portfolio of stocks and bonds, you should expect to get an average annual return of 7 or 8 percent. Theres really no reason to be paying more than 0.5 percent per year in fees.

eHow: What are the pros and cons of hiring a personal adviser versus buying stocks online?

ET: They arent necessarily mutually exclusive. The thing to explore with any brokerage firm is the kind of support and service they offer. Web-only firms might have seemingly low trading costs, but if you actually need to get someone on the phone, its not easy to do. Or they may sock it to you with other fees if you want to make a withdrawal from your account or something else. When you are evaluating investment firms, you need to look at the fees for all their services. See what levels of support and customer service they offer and if that matches what you want.