QUESTION: As a young prospective investor, my questions to you are:

1. I would like to buy some shares; what companies' stock would you advise I buy?

2. What is the maximum amount of shares a person like me should purchase?

3. I want to invest $250,000. Should I buy into more than two companies as a shareholder?

- Keith

PFA: You have taken a good first step by asking for guidance regarding your investment decisions. Increased knowledge and the experience you will gain over time will help you to make meaningful decisions.

I believe, from your first question, that you want to know the stock of which companies you should buy. It depends on what you want to achieve and what level of risk you are prepared to take, among other considerations.

To make that decision, you need to do some serious research of your own. See what sectors of the economy look more promising and select companies in those sectors. Analyse their performance and determine from your analysis what their prospects for the future are.

Some investment dealers publish their own analyses of companies in their newsletters or on their websites. Study these carefully. When you buy stock, you are buying on expectations of good future performance.

Make your own decision - with some guidance from a trusted, qualified, and informed person if you deem it necessary. Avoid tips. This is not horse racing. Do not be fooled into believing that the stock to buy is one that has done very well in the recent past. You may be buying it at its peak.

Only you know how much money you can invest in the market and remember that investing in the stock market is a long-term matter. You will not necessarily make money in the short term and recognise that prices will fluctuate.

Protect your portfolio

It makes little sense to hold on to a stock which clearly is not doing well and is not likely to do well in the foreseeable future. You may have to sell at a loss to protect the value of your portfolio.

Resist the temptation to churn, that is, to buy and sell a stock frequently as some investors do when they keep taking profit on a stock only to buy it again hoping to sell at a profit later. This can erode your profits because it causes your costs to increase. There are costs associated with each buying and selling transaction.

It is not prudent to invest money you may need soon because it might be difficult to sell at the time you need the funds. Further, you may not be able to recoup all of the funds you invested.

You should not buy stock with money you cannot afford to lose. In fact, investing in stocks should only be one part of your investment strategy. Decide on how you want to spread your funds among the different types of investment vehicles before launching into the stock market.

How you distribute your funds among the different classes will be strongly influenced by your goals, how much money you have to invest, the amount of risk you are able to take and when you will need the funds. There is no wisdom in putting all your funds in one type of investment. For one thing, this is bad for risk management.

Be realistic in your expectations and be aware of your risk tolerance. Be satisfied in your mind that you are able to deal with losses.

Use one stockbroker

With regard to your third question, a shareholder is the owner of shares. You will become a shareholder of several companies once you purchase their stock. It is up to you how many stockbrokers or investment dealers you select to do business with. People with large portfolios use several stockbrokers. It is probably better to use just one if you have a small portfolio.

You can also benefit from investing in the stock market by doing so indirectly - through unit trusts. They offer a relatively expensive way to invest but offer several benefits. They allow you to participate in a diversified portfolio, to benefit from professional portfolio management and to convert your investment to cash quickly.

It is good to start your investment programme at a young age. It allows you more time to recover from losses and to build on your gains over a long time.

Oran A. Hall is the principal author of 'The Handbook of Personal Financial Planning'. For free money-management advice, email: finviser.jm@gamil.com.