Thinking of becoming an investor? Well, buying stocks is one of the most enjoyable and rewarding activities a business-minded person can do. Also, it can be quite lucrative, given that you’ll end up purchasing stocks that would increase in price. However, this endeavor can also be quite challenging. Here are some tips that can help such a task easier for you:
- Learn the stock trading terminology.
By learning stock trading terms, you can properly decide what type of buy or sell order you’re going to place with your broker and place certain conditions on it. The “offer”, which is the ask price, is the lowest available price in buying shares of stock, while the “bid price”, which is simply known as bid, is the highest. If you’re requesting to buy or sell a security immediately at the best price available, then you’re making a “market order”, for which you’re going to pay the ask price as buyer. If you decide to sell, the market price you’ll receive will be the current bid price. Remember that your order could be executed at a higher or lower price than what you expect, and it could be guaranteed, but the price is not.
Other terms that you should know is the “limit order”, which is a market order with conditions on the buy or sell price, and the “stop order”, which is an order that would become a market order when a certain price is reached.
- Know how the stock market works.
In the stock market, products that are bought and sold are shares of ownership in certain companies. Shares of stock traded on stock exchanges, which you can consider as the marketplace. In the US, the major exchanges are the National Association of Securities Dealers Automated Quotation system (NASDAQ) and the New York Stock Exchange. Put in mind that stock prices will move up and down depending on demand and supply, where prices will rise when there’s a large demand for a stock and will fall when there are more sellers than buyers. Price isn’t necessarily a company’s actual value; rather, you can think of it as a reflection of the investment community’s opinion of the stock, which means short-term prices are often affected by people’s emotions, instead of facts and can change based on rumor, information and misinformation. As investor, your goal would be to purchase shares that will increase in value over time.
- Do some research.
When purchasing individual stocks instead of mutual funds, it is important to gain all the knowledge about it. Though there’s a lot of information on the net, finding useful data can still be difficult, so you need some tools to perform analysis and choose a stock. Usually, you can find information on a company’s annual report or website, from which you’ll know their business model and financial results. Also, companies often prepare investor presentations in an easy-to-understand format, so you can evaluate these documents before deciding to invest. As a new investor, it can be quite difficult for you to assess these reports, but this can be made easier with the use of websites, such as Morningstar.com, which offer access to a company’s essential information, like the income statement, balance sheet and statement of cash flows. Aside from this, you can always use Google to perform search for company news, particularly those that explain how they’re performing.
- Become familiar with the concept of value.
You can consider stocks as machines that generate profits for you, and if they’re performing well, then they’re highly valuable to you. One good way to value stocks is using the price-to-earnings (P/E) ratio, which takes the current share price of a company and divides it by the yearly earnings per share of stock. Earnings per share represent the total earnings divided by the number of shares that are held by investors. Basically, these shares are referred to as outstanding shares.
- Look for companies of interest.
When searching for a company to invest in, you should read investment websites and publications. You can start by investing in blue chip stocks, which are of big, well-established and recognizable companies having a track record of generating profits. Remember that their stocks are more likely to grow steadily in price in the long term, and while they present some investment risks, they’re often less volatile than those of other less-known companies. As you can see, blue chip stocks tend to have large market shares and they’re offered by companies that are well financed and are enjoying competitive advantage.
- Go for a business with good performance.
Once you find a prospective company to invest in, make sure you review some of their key financial indicators and compare them with those of their competitors. You should look at their profit margin, which would explain how much profit they’re generating, and their return on equity, which pertains to the total dollars invested by all of their stockholders and shows how well they’re using their shareholders’ money to generate profit. Look at their past and expected growth and compare their historic rate of earnings growth to its peers. Also, take a look at their debt, where an indicator of a well-managed company is that they should not take on more debt than they can afford to repay. One good way to analyze this is using the debt-to-equity ratio, which takes their debt and divides it by shareholder equity. Remember that it will be good for you if the percentage is low.
- Consider buying a mutual fund.
When you invest in a mutual fund, you’ll get a stake in every stock it invests in, which are considered by many as a lower-risk alternative to purchasing individual stocks, with diversification as the main reason. Take note that if you invest in a single stock, your risk will be concentrated in a single company, while a mutual fund can hold tens or hundreds of stocks, so if a stock’s value declines, you’ll be less affected in terms of your investment’s overall value.
A mutual fund is a wise investment decision if you’re just starting out, especially if you’re not sure about investing in stocks individually or if you don’t have enough time to manage or research a portfolio. However, take note that this comes with mutual fund fees.
- Find opportunities to buy stocks directly from the issuer.
You can buy stocks without using a broker through direct stock purchase plans (DSPPs), which might be your best option if you’re planning to purchase small amounts of stocks. In this option, you’ll receive a copy of the plan’s application form, prospectus and other relevant information that discloses important information your stock purchase. Remember that the investment price can vary, so you need to verify any fee that you need to pay. Another thing to take note is that DSPPs allow you to automatically reinvest all your dividends if you desire, where you’ll receive dividends based upon the company’s profits.
- Find a broker.
If you can’t purchase stocks directly from the issuer, then you’ll need a broker, which can vary in terms of the services they offer, which means you’ll need to compare your options and choose one that suits you best. Generally, there are 2 types of brokers, namely the full-service and the discount, where the former is more expensive and targets its services toward investors who are interested in receiving guidance and recommendations, while the latter is good if you’re planning to make your own investment decisions. Still, you should evaluate each broker’s platform thoroughly to ensure its offerings are in parallel with your investment goals.
- Open your own brokerage account to deposit funds.
When opening an account, you should contact a broker who can help you with filling out a new account form that documents your personal information, along with your risk tolerance and investment experience. Then, your broker is the one who’ll report your stock trades to the Internal Revenue Service (IRS).
Investing in the stock market is a great way to grow your wealth in the long term, and with these tips, you can get started and become a smart investor.