Beginners Guide to Buying Stock
Buying stock and investing in the stock market isn't complicated, but an investor should always know what he is trading when he buys and sells shares.
Purchasing shares of stock is historically one of the best ways to make your savings grow. However, investing in stocks is not without risk. As a stockholder, you are part owner of a company. If the company performs well, your shares are likely to provide a good return on your money, but if the company fares poorly you, as an owner, will probably lose money. For the novice investor, the keys to success are to identify your investment goals, develop an appropriate investment strategy and learn how to properly research stocks to maximize your potential profits and minimize losses.
Before you begin to buy stock, clearly identify your investment goals. You may be interested in growth stocks to build the size of your portfolio, or you may want to focus on high-dividend stocks that produce income with low risk even if they have less growth potential. You'll also need to choose which markets to center your efforts on. No one can realistically keep up with developments in every industry, so many people pick one or two industries (often related to their own professions) to invest in.
Not for Novices
If you are a beginner to buying stock, you are well advised to stick to the basics while you learn to select and invest in stocks and to avoid more exotic trading methods. Stock options and futures, along with techniques such as margin buying and short selling, all carry much greater risk than conventional stock purchases. The same is true of short-term strategies such as day trading and swing trading. All of these are entirely legitimate trading methods, but you should have some experience with basic investing and an in-depth understanding of the stock market before you risk your money.
Most investors open an account with a brokerage firm to buy and sell stocks. This is similar to opening a bank account except you will need a higher minimum deposit (usually around $1,000). Experienced investors often use a discount broker. As a beginner, you may want choose a full-service firm instead to gain access to their research tools and investment advice. If you lack the time to do serious research, consider inverting in stock mutual funds. These are professionally managed funds that use the money you invest to buy stocks. Before you select a fund, read the fund prospectus through and compare the fund's past record to similar funds (by law, the prospectus must include a history of the fund's performance).
One important option for the beginning investor, especially those with limited funds, is the direct stock purchase plan. Many major corporations offer plans in which you purchase stock directly from the company, eliminating broker's commissions. Transactions are handled through a transfer agent, and transaction fees are low (usually $1 or $2 per transaction plus a few pennies a share). Most plans require only a $250 to $500 initial commitment, which can be made in $50 monthly installments if you have them automatically debited from your bank account. Check on a company's Investor Relations page to see whether it offers a direct stock purchase plan.
The key to wise stock buying is to know what it is you are buying. Research any company before you invest any money in its stock. You can obtain a great deal of information on the "Investor Relations" website that virtually all major companies now provide. There you will find updates, news items and, usually, historical data and charts to assist your research. Most of all, you will be able to order (or usually just download) the company's annual report, which includes historical data, company earnings and revenues, and the company balance sheet. You should also find independent evaluations of the company. The Wall Street Journal, Kiplinger's and other financial publications are excellent sources of independent information.