How to Buy Stocks

  • Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice.

Guide Note: Buying stock is easier and quicker than it's ever been before, but certainly no less risky. If you're a first time investor, you'll want to prepare yourself for the volatile markets before plunging in. This page features a step-by-step guide on How to Buy Stocks, from selecting the right stock to making the transaction.

Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice. Table of Contents:

Introduction

  • There was a time (anytime before 1995, to be specific) when the average investor had only two principle tools for choosing and buying stock: The Wall Street Journal and a professional stockbroker. No longer. The internet offers more information and more options than ever before for the small investor. There's so much to sift through, in fact, that you could easily get lost. Read on to learn how to choose and buy stocks without getting caught up in risky schemes and minutiae.

Step 1: Select Stocks

  • As in Vegas, so it goes on the stock market: there's no such thing as a sure bet. However, if you cast a wide net and carefully scrutinize everything you catch, you're likely to find a few winners.
The Wall Street Journal is the major printed source for market news and analysis. (Creative Commons photo by Aidan C. Siegel)
The Wall Street Journal is the major printed source for market news and analysis. (Creative Commons photo by Aidan C. Siegel)
  1. Read The Wall Street Journal
  2. Read The Motley Fool
    • The Motley Fool is a less conventional, but also well respected, source of investing info. Its website is designed for the average investor and based on the idea that most people are qualified to guide their own investments, without the help of financial services.
  3. Read Stockscouter
    • Stockscouter is MSN Money's daily market blog, analyzing the markets and offering investment ideas. Remember, though, to view everything through a critical eye when it comes to stock advice (including this article).
  4. Follow the Trends
    • No, we're not suggesting you refresh your wardrobe every two months, but it's important to be aware of consumer culture if you're going to buy stocks. And while reading financial publications is an important aspect of this, you should also keep an eye out for savvy new products, convenient new services, brilliant new discoveries—anything that seems like a winning idea could make for a winning investment.
  5. Follow Your Beliefs
    • Though the stock market is mainly driven by the profit motive, it's occasionally driven by conscience as well. Many investors will buy shares in companies that reflect their political beliefs, or abstain from those that don't.
    • When you buy stock in a company, you're not just going along for the ride. You literally own part of that company, and the capital you invest could help make it a success.
    • For a list of environmentally conscious "green chip" companies on the stock market, have a look at EcoBusinessLinks.
    • For companies consistent with other causes that may interest you, try Googling the cause (pro-life, pro-choice, breast cancer, etc.) and the phrase "listed companies."
  6. Write down the names of the companies that interest you.

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Step 2: Analyze Stocks

  • Now that you've written down a few prospects, it's time to get serious. That's right: homework. But don't get all sullen like a school kid. When there's money at stake, it's easy to stay interested.

Analyze the Stock Yourself

  • For a detailed explanation of DIY stock assessment, see The Motley Fool's Analyzing Stocks. For a few basic pointers, read on.
  1. Go to Yahoo! Finance and enter the name of a company on your list in the field labeled Get Quotes.
    • To learn how to interpret all the information in a Yahoo! Finance stock quote, see How to Read the Stock Market. For the moment we're only concerned with a few aspects of it.
  2. When the quote appears, make a note of the ticker symbol.
    • The ticker symbol is a one to four letter abbreviation of the company name that's used to identify it on the market and in financial settings. It's important to write it down for future use.
  3. Note the price of one share of stock.
    • The current price is listed under Last Trade.
      http://finance.yahoo.com/
      Yahoo! Finance
    • This is the first gauge as to whether or not to invest in a particular stock. As of February 7, 2008, a single share of Berkshire Hathaway went for $135,900, while a share in Denny's restaurants was at $3.08. Invest according to how much money you actually have to spare.
  4. The Change field will tell you how much the stock has gained or lost today.
  5. Locate the Chart, which traces the stock's performance in visual form. (See screenshot at right)
    • Note that the links beneath the chart give you the option of viewing the stock's performance from the past five days to the past five years. Click on them to get a feel for the stock's long-term performance so far.
  6. Note the stock's one year target estimate (under 1y Target Est.).
    • This figure reflects the price median projected by market analysts, for one share, one year from now. Remember that these market analysts are often wrong.
  7. Note the Price/Earnings ratio (under P/E)
    • The P/E ratio is used to project the earning potential of a stock, based on its current price.
    • Stock with a higher P/E ratio (over 25) is considered to have high expectations, while stock with a lower ratio (under 20) is not expected to do anything spectacular.
    • This is a tricky gauge, as some lower-ratio stocks can be a more dependable investment than high-ratio ones. For an explanation of P/E ratio, see Motley Fool's How to Use the P/E.

Read Stock Analyses

  • While it's important to remain critical of anything you read, it pays to heed and compare the advice of a number of sources.
  1. Run a search for the ticker symbol and the word "analysis."
    • The first page of results should include a few written assessments of the stock, tracing its performance thus far and speculating on its future.
    • For example, a search for AAPL analysis turns up an article entitled "Will Apple rise or fall?"
    • Make certain to note the publication date for any article you find. If it's outdated, be aware that it may no longer apply.
  2. Use InvestorGuide.com's Stock Lookup feature for capsule analyses of different stocks.
  3. An online subscription to the Wall Street Journal offers company profiles complete with news reports and analysis.

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Step 3: Decide How to Invest

  • There are actually three principle ways to purchase stock: through full-service brokerages, discount brokerages and, lastly, direct investment plans with the company itself.
Merrill Lynch is a full service brokerage and major financial institution. (Creative Commons photo by Rob Lee)
Merrill Lynch is a full service brokerage and major financial institution. (Creative Commons photo by Rob Lee)

Full Service Brokerage

  • If you go with a full service brokerage like Merrill Lynch or Smith Barney, you're essentially flying first class. You get the amenities, plus a host of features you may not need, and pay accordingly.
  • Benefits: You're assigned a personal broker to advise you on the best investments and sift through stock analyses and market trends so you don't have to. If you get a good one, he or she will work extremely hard to increase your wealth. Your broker may also provide guidance on taxes and retirement planning.
  • Drawbacks: Full service brokerages charge high rates for stock transactions (around $150, as of 2007), as well as extra annual fees and other regular fees. If you don't have much to invest, this could easily offset your earnings. Also, the broker assigned to advise you at a full-service brokerage receives a commission for every trade you make, a factor which may bias their advice.
  • For a list of full-service brokerages, see Yahoo! Directory.

Discount Brokerage

  • Discount brokerages like E*Trade and Scottrade give you the basic tools you need to invest. Most of your transactions will be made online and at your own initiative.
  • Benefits: You save money. Compared to full-service brokerages, the commission on each trade is negligible (for example, $7 per transaction, as opposed to over $100). The minimum investment is much lower than for a full-service brokerage. Many discount brokerages offer an online kit of useful stock analysis tools.
  • Drawbacks: Discount brokerages require you to stay on top of your own investments, rather than having a stockbroker to it for you and alert you at crucial junctures. If you have a complicated portfolio and not much time to deal with it, this may be become a problem.
  • For a list of discount brokerages, complete with rates and reviews, see SmartMoney's Discount Broker Rankings.

Direct Investment Plan

  • Though relatively few companies offer the option and very few investors know about it, it is possible to purchase shares directly from the company, with no broker involved.
  • Benefits: Because there's no intermediary, the cost per transaction is minimal, as little as $2.
  • Drawbacks: Your options are extremely limited reflecting only a small fraction of the companies listed on the stock market.
  • For a comprehensive list of those that do offer direct investment, see Enroll Direct.

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Step 4: Invest

  • Once you've evaluated a particular stock (or stocks) and decided to jump on the boat, it's time to get out the wallet. Remember, you could lose it all, as so many did in the Stock Market Crash of 1929. So keep in mind your own well being and that of your family: only invest what you can spare.
  1. If you've chosen a full-service brokerage, make an appointment for a meeting with a broker.
    • Most of them have 800 numbers listed on their websites. Call and have the operator direct you to a local office.
  2. If you're going with a discount broker, simply go to the site and click on open an online account.
    • Most have 800 numbers, if you wish speak with an actual human before opening an account.
  3. For direct investing, follow the links on Enroll Direct to the company's official direct investment page. Proceed according to the directions on the page.

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