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How to Buy Stocks: How to Invest in the Stock Market in 3 Steps

It’s no news anymore. You must have heard about stocks rising and falling or the current stock market fluctuating. If not, your attention most have been cut by bill boards with up and down pointing arrows. The up pointing arrows indicate rising stocks prices while the down point arrows, a fall in stocks prices.

What immediately comes to the mind of most people when they see bill boards is; what is a stock? what is the stock market? How to buy stocks or how to invest in the stock market? How to invest in stocks? What are the benefits of the current stock market? If you are one of those who have ever wonder how to buy stocks or are looking to know how to invest in the current stock market, you are not alone!

When you buy stock, you are simply buying ownership or share in the company that issues it. This gives you certain rights in the company like most other shareholders.  For example, a stockholder has the right to receive a dividend if the company makes sufficient earnings, has the right to sell their shares of stock for a gain and also, the right to vote or to be voted into administrative position of the company (this depends on the type of stock). You can purchase a stock mutual fund, or buy individual shares of stock.

 

How to Buy Stocks: What is a Stock?

A stock generally referred to a type of security that signifies ownership in a company and represents a claim on part of the company's assets and earnings. Buying a particular company's stock makes you and gives you the rights of a shareholder.

There are generally two types of stocks (shares or equity): common stock and preferred stock. The Common stock usually entitles the holder to vote (or being voted) at shareholders' meetings and to receive dividends while the Preferred stock on the other hand does not have voting rights, but has a higher claim on earnings and assets compare to common shares. For example, preferred shareholders are legally entitled to receive a certain level of dividend payments before any dividends can be issued to common shareholders.

When you buy a stock from a company, you immediately become a stockholder or shareholder of the issuing company and have some claims to a part of the company’s earnings and assets. In other words, a shareholder is an owner of a company. Your level of claim or right or ownership is determined by the number of shares you owns relative to the number of outstanding shares. For instance, if a company has 10,000 outstanding stocks (shares) and a person purchased 500 shares, that person would own and have right to 5% of the company's earnings and assets.

 

How to Invest in the Stock Market:

Step 1: Learn about the Stock Market

The first step to investing in the current stock market, just like any other market need a good understanding on the working of the market. The only different is that, in the case of the stock market, the products being sold and bought are percentages of ownership in companies known as shares or stocks.

In the current stock market, stocks are traded on exchanges. You can consider a stock market as an exchange marketplace. For example, in the U.S., the major exchanges include the National Association of Securities Dealers Automated Quotation system (the NASDAQ) and the New York Stock Exchange.

Fluctuating Stock Prices: The changing stock prices (up and down) solely depends on supply and demand. This means that when there is a large (increase in) demand for a stock, its price is force to rise and vice versa. This is due to the fact that there are more interested buyers than sellers, the stock price goes up. Whereas, when there are fewer buyers than sellers, the price goes down.

Stock prices are also influence by the opinion of the investment community. The price of the stock in such case is not necessarily the actual value of the company. This implies that short-term stock prices typically are affected by people's emotions, rather than by facts. The prices can change due to rumor, information, or misinformation.

While trying to known how to invest in stocks, your goal should be to purchase stocks (shares) of a company that has the highest chance of increasing in value over time. When the issuing company grows their sales and generates more profits, investors may buy more of the stock even at higher prices. At the same time, as the stock prices goes up, you will be able to sell your shares for a gain.

For example, let us consider a scenario that you purchased 100 shares of stock priced at $20 each. That's a total investment of $2,000. After a years, the stock price increases to $10. This means, your investment now is worth $1,400. If you sell your shares at the current stock market price, you’ll make a $400 gain before any fees or commissions.

 

How to Buy Stocks: Know the Terminology Related to Stock Market

These terminologies or terms are helpful in determining exactly what type of sell or buy order you want to place with your broker. They allow you to place certain conditions on your order to sell or buy stocks.

The offer, also known as the ask price. This is the lowest available price when trying to buy shares of a stock. Assume you want to buy NASDAQ common stock. If the current offer is $100 per share, you would pay the $100 price for the stock.

The bid (or bid price): This referred to the highest available price you can find when trying to sell shares of a stock. If you own NASDAQ common stock and want to sell it now, you would receive the current bid price per share. If the bid price is $67.05, you would receive that price per share.

A market order: This referred to a request to buy or sell a security (ownership) immediately at the best available market price. If for example you place a market order, you will pay the ask price as a buyer but if you are selling instead, the market price you receive is going to be the current bid price. Note that your market order could be executed at a price lower or higher than what you're hoping for.

In addition to a market order, you can also place orders that put conditions on your buy or sell price. A stop order, for example, is an order that becomes a market order once a certain price is. On the other hand, a limit order is a request to buy or sell a security at a specific price or better. Also consult with a broker (a licensed person to trade securities or stocks) if these other types of orders are right for you.

 

Purchasing mutual funds. This is a pool of money provided by many investors. The mutual fund pool can be used to purchase a variety of investments. You able to select a mutual fund that invests in the stocks of more than one company. When investing in stocks through a mutual fund, you achieve a stake in every stock the fund invests in. This is a great way to lower-risk instead of purchasing stocks individually.

Investing in stocks via mutual funds has the capability to lower your investment risk. This is due to the fact that it diversified your investment. When you invest in a single stock, your risk is high because it concentrated in one company. If this company make a lose, you are directly affected. A mutual fund, on the other hand, may hold dozens or hundreds of stocks. If the value of one stock declines (when its issuing company makes a lose), it will have little effect on the overall value of your investment.

If you’re just starting out in stocks, mutual fund can be a good way to investing in stocks. Choose a mutual fund if you don't have sufficient time to research and manage a portfolio, or if you feel uncertain about investing in stocks individually.

Note mutual fund fees. Remember that you will pay fees for professional money management in a mutual fund. For instance, you may require paying a sales charge when you buy or sell your fund. Fund investors are also expected to pay an annual fee for the money management and operation of the fund. These fees are generally based on a percentage of the assets under management.

 

How to Invest in the Stock Market:

Step 2: Study Stock Purchase

If you decide to invest in individual stocks instead of a mutual fund, it is necessary to carry out some research. There is a good amount of data available on the Internet. Getting useful data can be a difficult process however, there are some useful tools or platforms you can use to perform analysis and select a stock.

Generally, a company's website or in their annual report will contain information about its stocks. These resources can provide useful and valuable information about a company's business model and financial results. Also, companies frequently prepare investor presentations which are often provided in an easy-to-understand format. Make sure you review these documents before making an investment decision.

Conduct specific Google search for news about the company. Go through the recent news articles that explain how the company is performing. It’s better to look for an independent third party news source so that the information should not be biased.

Also, a websites like Morningstar are also useful source of information. New investors can find quarterly or annual reports overwhelming. By searching a stock on Morningstar, you can access vital information on a company, like the statement of cash flows, balance sheet, and income statement. Morningstar also provides essential financial ratios, which are used in analyzing the company. This site is easy to review and navigate.

 

How to Buy Stocks: Look for the companies of interest 

You have to search for a good company to invest in its stocks. The first step to do this is to search and read investing publications and websites, such as Investor's Business Daily or the Wall Street Journal. Other similar good sites include Stockchase can provide ideas for stocks that analysts rank highly.

Start by investing in blue chip stocks. These are large, well-established companies with a track record of generating profits. These companies are typically recognizable corporate names. They specialized in products and services that consumers know, love and purchase. Blue chip stocks are more likely to grow steadily in price over the long-term.

While these companies do present some risk to the investor, they are also regarded as less volatile than other companies. Blue chip stocks companies tend to have a large market share in the markets they operate. They are well funded, and may enjoy some competitive advantage.

Blue chip stocks include Amazon, Google, Walmart, McDonald's, and Apple, among many others. Think about companies that you turn to for products and services.

 

How to Invest in Stocks: Select a business that performs well

Once you find a good company to invest in, you should start by reviewing some key financial indicators about the company. Compare those indicators with the company’s competitors to see how best the company is performing. There are some specific indicators that are widely used to assess the investment value of a company. These consist of:

Profit margin: This is defined as the (net income)/ (sales). Look at the company's profit margin. The profit margin explains how much profit a firm generates for every dollar in sales. A company always wants a higher profit margin. If a business for example earned 5 cents on every dollar sold, the profit margin would be (.05)/ ($1), or 5%.

Return on equity: Equity refers to the total amount (in US dollars) invested by all company stockholders. Analyze the firm's return on equity which indicates how well a company is using its shareholders' money to generate profits. The ratio is (profit) / (shareholder equity). For example, if a company earned $10,000 profit on $1,000,000 in equity, the return on equity for this company would be ($10,000)/($1,000,000), or 1%.

Past and expected growth: The Company’s past and expected growth should be a good indicator for investment decision. If the company is steadily growing earnings per share, then it’s a good indicator you may invest in the company’s stocks. This is also a sign of a strong business that likely has a competitive advantage of some sort.

The company’s historic rate of earnings: Compare its historic rate of earnings growth to its peers and also, the projected earnings growth rate for the next five years. If these rates are higher than its peers, that’s an indication that you may invest in the stocks of the company since there is a greater chance of that the stock prices may increase.

The company's debt: Look at the company's debt. A good or well-managed company should not have too much debt, more than it can afford to repay. A good way to analyze debt is using the debt-to-equity ratio.

The debt-to-equity ratio: This ratio is the division of the company's debt by the shareholder equity. For example, if a company has $1,000,000 in debt and $2,000,000 in equity, the debt-to-equity ratio would be ($1,000,000)/($2,000,000), or 50%. The lower the ratio, compare to the ratio of the firm’s competitors, the better the company. Compare.

 

How to Buy Stocks: Understand the concept of value

Let’s simple put it this way. If we consider a stock as a machine that is designed to generate profits. We (investors) would only consider this machine as more valuable if it is meeting our goal or when it is performing well and generating more profit. The most important financial ratios for a stock’s value relate to earnings.

The price-to-earnings (P/E) ratio: The common way to value a stock is to use the price-to-earnings (P/E) ratio. This ratio is the division of the company's current share price by the annual earnings (profits) per share of stock. This is a vital tool to evaluate the value of an investment.

Earnings per share: This is the ratio of the total earnings in dollars to the number of outstanding shares (total number of shares held by investors). For example, if a company earns $2,000,000 per year and has 20,000,000 shares outstanding, it’s earnings per share will be ($2,000,000) / (20,000,000 shares), or 1 cents per share.

Assume that a company’s stock is trading at $50 per share. When the earnings-per-share total $5, the stock’s P/E ratio is ($50/$5), or 10. If an investor invests in this particular stock, he would be “paying 10 times earnings”.

If Company X is trading at ten times earnings (or a P/E of 10), and Company Y is trading at a P/E of 8, Company X is more expensive. Note that "more expensive" has nothing to do with the share price. However, the multiple is a reflection of how expensive the share price is relative to earnings.

 

 

How to Invest in the Stock Market

Step 3: How to Invest in Stocks, Buying and Selling

Direct stock purchase plans (DSPPs): Some companies offer direct stock purchase plans (DSPPs) that allow you to purchase stock without using a stock broker. Investigate this possibility of buying stock directly from the issuing company.  If you are planning to buy a small amount of a certain stock, DSPP may be your best option. This DSPPs approach saves you the time and cost of going through a broker.

Call or search the company whose stock you wish to buy online. Ask them if they offer DSPP (direct stock purchase plan). If they do, the company will in the best place to help you through your investment. That is, they will forward you a copy of their application forms, plan's prospectus, and other relevant information. The prospectus is a document that discloses all of the important information about a stock purchase.

Many of such DSPP plans allow you to invest as little as $50 per month. Verify if there is any fee you need to pay. A few companies offer a free investment plans.

DSPPs also provide you the advantage of automatically reinvest all your dividends as you want. Dividends are generally paid based on the profits generated by the company. The company’s board of directors must declare a dividend in order for a payment to be allowed.

 

Get a broker. If you are unable to buy the stock you want directly from the issuing firm, you'll need to use the services of a broker. Brokerage houses vary in terms of the services they provide. This simply means that you'll have to compare many brokerage firms and choose the brokerage that best aligns with your goals. There are two types of brokers: full-service and discount.

Full-service brokers: These brokers are generally more expensive. They target their services toward investors interested in receiving guidance and recommendations. The higher fee may be worthwhile looking at the services they provide. However, because full-service brokers typically provide valuable assistance, if you’re unable to make a decision, not confident in your ability to pick stocks or how to buy stocks, consider working with a full-service broker.

Discount brokers: If you confident in your ability to make your own investment decisions or know how to invest in stocks, go for a discount broker. There is actually no point in paying a higher fee for services you aren't going to be using. However, you must examine each broker's platform or tool closely to make sure their offerings align with your investment objectives.

Search online discount brokers: Analyze the fees, especially those hidden charges that may not be mentioned when you first contact a prospective broker. Seek to have a written disclosure of all fees charged.

 

Investing in Stocks: Open an account and deposit funds

Contact your prospective broker about opening an account. You will normally be requested to fill out a new account opening form. This form documents your personal information, your contact information, together with your investment experience and your risk tolerance.

Your broker must report your stock investment to the IRS. Specifically, all stock transactions, including sales proceeds from a stock sale, and dividend income, are reported to the IRS. You will be requested to fill out the required forms and send them back to the broker.

Determine how to deposit funds into your brokerage account. Most stocks brokers operate electronic account which you are able to use your credit cards to deposit and retrieved money from it. Send your broker an initial deposit of money that will be used to make your first stock purchase. Most brokers have a minimum amount of money you should deposit in your account on the onset of your investment.

Enter an order. Notify your broker of the company whose stocks you are interested in and the number of shares. Your broker will notify you with your confirmation notice once your transaction is completed. The confirmation is your record of the transactions; keep all of your confirmations on file.

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