How To Invest In Stock
When most people think of how to invest in stock, they immediately conjure up thoughts of Wall Street with people shouting and stock tape flying everywhere. It seems like confusion and madness without any rhyme or reason to what stocks to invest in and where to find them. In the real world buying stocks is really quite simple, especially with today’s technology and online investing. So just how do you buy stock? Let’s take a look.
Well first it’s important that we define stock. When most people say stocks they are referring to common stock in a company (as opposed to preferred stock). Well that definition is great but what is stock exactly? Essentially a share of common stock is like getting a slice of pie, assuming a company was a pie. The more shares you get the bigger the slice of the company you have. As the company gets bigger (ie…make more money) your shares become more valuable and you could eventually sell them to another investor and take your profit (known as a capital gain).
There is a lot more to it than that simple example, like the fact that shareholders of common stock have voting rights, sometimes get paid dividends, get invited to the shareholder meetings, etc, but for now let’s stick with our basic pie definition in favor of a more advanced stock for dummies lesson later on.
So back to what you were asking… how to invest in stock, well first you need a broker account somewhere. Where you want to get this broker account is up to you, whether it be online investing accounts or a face to face with a higher priced broker, there are a lot of options so try to find the best one for you. The biggest benefit for online investing is the cost savings with low commissions, but the tradeoff is you have to do your research yourself and don’t get a person to bounce investment ideas off of when you aren’t sure.
Conversely if you are more comfortable using a person for your investments it is typically a lot more expensive but in return for that high investment commission you get some advice on what stocks to buy in 2010 for example. One of the things I don’t like about working with a broker face to face though is the sales incentives going on behind the scenes. There are some companies who encourage their employees to push a certain investment option that benefits the company, and in return give the broker money, trips or a set of steak knives for convincing me to buy that stock, mutual fund or whatever. Not every company is like this but there are some out there so be sure to do a little of your own homework before jumping in on someone elses’s stock analysis… just my two cents.
Anyway where was I? Ah yes, how to invest in stock. Now that you have your broker account you need to decide what stock to buy. This can be as simple or as complex as you want to make it, but I recommend you err on the side of caution and do a little homework before jumping in on a stock. There are tons of free research tools out there, and your new found stock broker should provide you with some investment tools as well so go ahead and learn how to use them, they will benefit you.
So how do you research a stock you want to invest in? Well there are millions of investment strategies out there that you can use to figure out what stocks to invest in and none are right for all of us, but if you wanted a quick start I would look at the news for the company and make sure there is nothing negative out there that would cause their shareholders to run for the hills. Assuming the news on the company checks out ok move on to the company’s financials. Does their income statement show positive income? Do they have positive income in previous years too? Was there any extraordinary event that cause the company to make so much money that may not be there next year? These are some questions you should ask yourself before you invest in stocks for the company.
Once you have figured out what stocks to invest in you need to figure out how much stock to buy in that company. A good rule of thumb is to have no more than 20% of your portfolio invested in any one sector. This is known as diversification and the more diversification you have the better off you are because if a sector goes down the tubes you still have at least 80% of your stocks keeping you afloat. If you want to invest in one stock or one sector that’s fine too, but if your portfolio gets flushed, don’t say I didn’t warn you.
Once you figured out what to buy and how much to buy it’s just a matter of contacting your broker (or logging in to your online investing account) and making the transaction. I hope this tutorial on how to invest in stocks was helpful, I know it was extremely simple but I’ve had requests for a real investing in stock for beginners guide and this is what I came up with. Until next time.
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