Why should I buy stocks?
Stocks can be a great way to grow your money relatively quickly as long as you have done some research and are buying stocks that are expected to grow. Stocks can also be a way to generate regular income, especially if you invest in companies offering a quarterly dividend.
Conservatively investing in stocks over the long-term is one way to reach a long-term financial goal, such as saving for retirement or putting your kids through college.
Step 1. Budget for buying stock
There’s no specific dollar amount that you need to have saved up before you can buy stock, as long as you have enough to cover your brokerage fee along with your actual investment. Think about why you want to buy stock. Are you trying to get money fast (in the next 12 months), or is this more of a long-term investment? Having an investment strategy will help you determine how much money you have to spend and which stock(s) to buy.
Never put money into the stock market that you can’t afford to lose. The stock market is akin to gambling since it’s risky and includes several variables that are out your control that can make or break your investment.
Step 2. Learn the stock market lingo
Buying stocks can be confusing. Here’s a cheat sheet of common terms you’ll see when you’re researching which stocks to buy:
- Stock: Stock is a representation of a stake, or ownership, in a particular company. This means when you own a share (or more) of stock in a company, you become a part-owner of the company. The more shares you own, the more control you have.
- Dividend: A dividend is the payment a corporation makes to its shareholders. It’s generally distributed from the profits made by the corporation and are paid out either quarterly or annually. A company that pays out dividends is likely profitable, which means it’s a good company to invest in.
- Price to earnings ratio: Often shown as P/E, the Price to Earning Ratio is the amount paid for the stock in relation to the profit the stock earns per share. A high earnings per share (EPS) is usually a sign of a company that is doing well.
- Market value: Also referred to as “market capitalization,” market value is the end value you get after you multiply a stock’s outstanding shares by the price of one share. The calculation is pretty simple. For instance, if you’re looking at stocks for a corporation with one million outstanding shares priced at $5 each, the market value is $5 million.
Market value is divided into five categories: ultra cap ($25 billion and above), large cap ($5 billion to $25 billion), mid cap ($1 billion to $5 billion), small cap ($250 million to $1 billion) and micro cap ($250 million and below). A large cap stock is generally safer than a small cap stock. A small cap stock, though, has better grown potential. Basically, what you want to get out of your stock will determine what size cap you go with.
There are two ways to buy stocks: through a broker and through a company’s direct stock purchase plan (DSPP). Going through a broker is the more common way of buying stocks, and it can be a benefit for new investors who want the added bonus of guidance and advice as they start investing.
There are three types of brokers you can work with:
- Full-service broker: A full-service broker is the most expensive way to buy stocks, but it can be worth the added cost for new investors. These brokers provide guidance, recommendations and advice, which can help you make better investment decisions. If you are not confident in your ability to make good stock buying choices, and/or if you are short on time and want someone to do the research for you, this is a good option.
- In-person discount broker: These brokers will meet with you face-to-face, but they don’t provide the added services of recommendations and guidance of full-service brokers. The broker gets paid a commission (usually several cents per share) for handling the buying and selling of your stocks for you. They don’t pick the stocks for you but rather just do what you ask them to do.
- Online broker: Many large firms have online options, and there are also brokerages that operate solely online. One benefit of managing all of your stock tradings online is the cost–the commission is lower than you would pay for an in-person discount or full-time broker since you aren’t working with a specific individual.
What to do if you want to buy stocks without a broker:
If you want to buy stocks online without a broker, then you’ll want to go through a company’s DSPP (direct stock purchase plan). This is one way to save money since you don’t need to pay a commission fee to a broker. In general, DSPPs have a minimum deposit requirement ranging from $100–$500. Go with a DSPP if you have a sound investment plan, are looking for an inexpensive way to get into long-term investing and have a good grasp on which companies you want to invest in.
Step 4. Pick the stocks you want to buy
When it comes down to it, which stocks you choose to buy are a personal decision. You should make your decision based on your own research and knowledge of the company. Here are some general guidelines to help you reach your decision, especially if you are new to investing.
Buy from a company you know and recognize
It’s not a good idea to buy stock from a company you don’t recognize. Understanding a company and how their products work will make it easier for you to put the company’s financial reports into a context you can understand.
Of course, if a company you’re unfamiliar with seems appealing, by all means, research it and invest if you want to. Just make sure you really understand the company and the product it’s selling before you give them your money to avoid surprises.
First-time investors should buy stock in a company they recognize and trust.
Buy stock in a company with a habitual consumer base
If you want to earn a steady income from a company’s stock, invest in a company whose product is habitual. Examples include coffee and cigarettes, among others. This type of company is more resilient to recessions and other economic hardships because their customers will continue to buy from them while they cut back on other non-necessities.
Invest in a company that’s been around for a while
Investing in startups can be rewarding, but when you’re just getting your feet wet it’s a better idea to stick to companies that have been around for a while. You’ll have a solid historical record to research along with the security of dealing with a stable company. You can venture out and buy stock in a newer company down the road once you’ve gotten the hang of investing.
Step 5. Select your order type and buy your stock
There are two main types of orders for buying stock:
- Market orders: When you place a market order, you buy a share of stock at the current market price. The exchange happens immediately, no matter how much one share of stock costs. Because the stock market fluctuates constantly, the amount you pay for your stock can change.
- Limit orders: With a limit order, you put a maximum cap down on how much you’re willing to pay for one share of stock. So if, for instance, you want to buy a share of stock when it costs $10/share but it currently is $12/share, your order won’t go through. It will only go through when the price drops to $10/share.
Work with an online broker to figure out which method is best for your investment.