Investing In Stocks – Things You Need To Know
A stock is an equity investment that represents some kind of ownership in a company and gives you the right to a portion relative to your holdings in the corporation’s earnings and assets. They don’t really issue actual “shares” anymore. Presently, share ownership is basically electronically recorded. These shares are held in a street name generally by your brokerage. Investing in stocks is a highly rewarding endeavor. In fact, it is best to recognize all of your investment plans as a business. This is what Benjamin Graham (Warren Buffett’s stock market mentor) highly recommended. Before buying your first stock, you should master the fundamentals of investing in said stocks. This article won’t make you a great investor overnight. You learn how to invest after years of experience and knowledge.
How do you purchase or buy stock?
The first time you go to purchase stocks can be confusing. When you sell or buy stock, you’re actually executing a trade. The time to execute your trade varies from broker to broker as well as market to market. Trades are in essence instant, unless you are trading a stock that has very low daily volume. You won’t actually notice a large price difference in the duration between placing your order and the execution.
After placing an order, your broker will most likely route the order through their sophisticated computer networks to acquire your shares. In some circumstances your order may never leave the broker .Your brokerage might need to clear out the shares of the corporation they own so they sell you the stock themselves.
There are four primary ways to invest your money in stocks
Investing through brokers: These are the intermediaries who bring together buyers and sellers when executing trades. The brokerage operations are done by a professional security market analyst. Brokers are licensed to act on behalf of the buyer and seller. Brokers also inform and consult the client on risk related matters.
Investing through an IRA/RRSP: This method offers a larger selection for investment within the account as compared to an employer sponsored plan like the 401k. In most cases you can buy different individual stocks. Additionally you can decide to trade options. You can decide not to do any of these things and choose a robo-advisor (a computer-powered investment manager) — to manage all the operations for you.
Investors can invest through mutual funds as well as exchange traded funds or index funds. Through a fund, you’re actually buying a portfolio of investments instead of a single stock. For instance, an S&P 500 index fund, invests in about 500 of the largest U.S. corporations; it is classified as a “large cap” fund for that matter (“cap” can be described as the valuation of companies).
Investing through a direct stock purchase plan or even dividend investment plans: Direct stock purchase plans (DSPP) are investment services that allow an investor to purchase stocks directly from a company or even through a transfer agent. It is critical to note that not all corporations offer DSPPs, and the plans most of the time are restricted based on when an investor can purchase shares. Through the use of this plan you can avoid costly commissions.
Investing through a 401k plan or 403b plan if you work for a nonprofit organization: Your retirement money can vary depending on the type of savings account you have. For a long-term goal like a retirement plan, most people want to invest mostly in stocks which have a high chance to earn more than inflation. Including some cash or bonds to your portfolio can greatly help in reducing the volatility of your general portfolio. A well-diversified portfolio for instance with a mix of stocks, commodities and bonds can provide the highest returns.
Advantages of investing in stocks
- Stocks are very easy to buy these days. This has been made even easier by discount online brokerages.
- It is a way of maximizing your wealth. Money cannot grow significantly sitting in a savings account.
- It is a better way to hedge against inflation.
Types of Stocks
1. Common stocks
When investing in stocks, you basically acquire an ownership role in the actual business. You also acquire ownership in net earnings and available dividends resulting from the firm’s operations. Equities (stocks) have been the highest returning asset group and have produced the most wealth out of any other investment.
2. Preferred Stocks
This is a special type of stock which pays higher dividends but has limited upside. The difference between common and preferred stocks is that common stock provides shareholders with voting rights but there is no guarantee of dividend payments. On the other hand the preferred stocks give no voting rights although it usually guarantees a dividend payment.
Finding good “value” stocks
These are stocks for companies that have low price to earnings ratio, low price to sales ratio and low price to book ratio. In other words, these stocks are under priced when compared to other companies in the market. Many investors opt to invest in common stock rather than preferred stock. The growth (and loss) potential for this asset is relatively higher. If you are interested in some strategies that the greatest investor of all time Warren Buffett uses, check out my previous article here.
The following are some of the steps you can employ when investing in stocks:
1. Determine what kind of investor you are and what sector you’d like to focus on
It is important to consider investing from the sector which you know best. You can either choose the stocks yourself or request that an advisor do it for you. It all depends on you, the investor. There are numerous investment styles out there and you need to find one that suits you!
2. Choose either mutual funds or stocks
Mutual funds allow you to purchase small portions of different stocks in a single transaction. Think of mutual funds like a basket filled with different types of stocks. ETFs and Index funds track an index; for example, a S&P 500 fund replicates that index through purchasing the stock of the companies inside of it. After investing in the fund, you also own some small pieces of the companies. You are allowed to put several funds together in order to build a diversified portfolio. For individual stocks, you can purchase a single share or even few shares if you are interested in a specific company. Try to diversify your portfolio if you choose to go the individual investment route as a portfolio that is not diversified is subject to a lot of risk if the sector tanks.
The advantage of mutual funds is that sometimes they are inherently diversified. This lowers your risk. They are however unlikely to increase as much as some individual stocks might. There is also an issue arising right now that is really shining a light on some of the fees that mutual funds are charging and how investors would be better off going elsewhere.
3. Opening an account
After analyzing your budget and the type of investment vehicle you want to get into, it is very important to open up an account so that you can begin trading. In case you’re opening a new account, you need to take into account the brokers that have relatively low account minimums and low fees. This will save you a lot of money in the end, especially if you are deciding to trade.
4. Carry out proper Research
In conclusion, research is very critical before you decide to invest in a stock. This is made to help you with the basics of trading. You can’t predict the market, although you can do as much as possible to direct your portfolio towards [positive returns. This means that researching past performance, recent news and analyst ratings and the companies quarterly and annual reports is imperative. This information should be available in your broker’s website.
If this article hasn’t helped you enough, feel free to check out this great Youtube video I found!