Devoted to understanding the basics and fundamentals of investing

Melonie is a 32 year old divorced mother of a 5 year old.  Her savings are in a brokerage money market account that pays better than her local credit union.  She is selling her house.  After paying all her bills and putting away some emergency money in her regular savings account she will still have some money to invest.  She is very conservative in her investments and will put most of the proceeds in bonds and CDs.

Melonie asks,

1. What are acceptable metrics for finding good companies by doing analysis?
2. How do I invest?
3. How do I diversify?
4. Because of my daughter, risk of lose terrifies me but I know I need higher returns.  Help me find something I can sleep at night with.

Melonie, I read something at Motley Fool yesterday.  I quote, "Retirement funds are for retirement."  If this lump sum you are investing is for retirement, you have roughly 33 years before you will need it.  This should give you great comfort. 

In investing, time is your friend.  It allows you to ride out business cycles and it allows investment returns to compound over and over again.  Because the stock market reflects the growth in the economy, you can expect a positive return over time.  Most recessions in the US last less than a year.  Then the economy and the stock market start to grow again.  If you don't panic and sell at the low, you will get your money back and then some.  So, don't be too nervous about putting some money in the market.

To invest in stocks, I would go to one of the discount brokers like Charles Schwab or Fidelity.  They make opening an account fairly easy.  Once you have an account open you can start automatic deposits.  I highly recommend this.  It is by far the easiest and most consistent way to save.  If this is retirement money, tell them you wish to open a Roth IRA.  Also, tell them you wish to invest online.  Make a deposit of the money you are going to invest.

I would not try to find individual companies.  It is very difficult even for professionals to out perform index funds.  I strongly recommend individual investors buy broad index funds like the Russell 2000 or the S&P 500.  These funds give you broad diversification, they are not as volatile as individual stocks and will lower your overall trading costs as you can buy and sell 500 or 2000 companies with one trade.  All of my personal investments are in index funds.

With the amount of money you have to invest, trading costs become critical.  If you have $1,000 to invest and you spend $30 to invest it that is 3.0% right off the top that you don't have to earn a return.  If instead you buy an index fund for $10,000 and spend $30 to do it you only spent 3 tenths of a percent and can put 99.7% of your money to work.

You can invest in either a low cost mutual fund like those in the Vanguard family or in a low cost Exchange Traded Fund like those in the iShares or Spyder families.  I've discussed pros and cons of these before and you can find them in the archives. 

To actually buy a security, open a browser, go to the broker web site and log in.  Get a live quote for the security by typing its name or symbol in the indicated space and hitting the button next to it.  Take the money you have to invest, subtract the transaction fee and divide the answer by the quote you get.  This will tell you roughly how many shares you can buy.  Go to the trading section of the web site and follow the instructions to buy the security you desire. 

I personally use market orders to buy, although some investors like to buy at the open or closing price or like to specify a level.  The sites all have a review of the order built in so you can make sure you are doing what you want to do.  They also estimate the total amount the order will cost so you can insure you don't overspend.  When you are satisfied you have your order right, execute the trade.  It will generally take from 1 to 30 seconds for your trade to be executed and you can review the results almost immediately.  While you lock in the price at that moment, the stock doesn't actually get to your account for three days.

Melonie, I hope this helps.  Ask more questions if you need more help.  Now go out and make some money!