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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.
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Introduction
- There was a time (anytime before 1995, to be specific) when the average investor had only two principle tools for choosing and buying shares of stock in major companies: 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 to autonomously decide on their own investment in companies of their choosing. There's so much to sift through, in fact, that he could easily get lost in all that freedom! Read on to learn how to choose and buy shares of stock without getting caught up in risky schemes and the minutiae of the industry.
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 before and as you make your investment, you're more likely to find a few winning stocks.
- Read The Wall Street Journal
- Whether or not you agree with its editorials, there's arguably no better source for financial information than the venerable Wall Street Journal. In addition to its premium print edition, The Wall Street Journal's online edition is free.The Wall Street Journal: Business News & Financial News
- Read The Motley Fool
- The Motley Fool is a less conventional, but also well respected source of investment info. Their website is based on the idea that most people are qualified to guide their own shares and investments without the help of financial services, and it is designed with the average investor in mind.Wikipedia: Motley Fool - The Motley Fool versus Wall Street
- Read Stockscouter
- Stockscouter is MSN Money's daily financial market blog, which analyzes markets and companies and offers investment ideas.MSN Money: StockScouter Stock Rating System
- Follow the Trends
- No, we're not suggesting you refresh your wardrobe every two months. Rather, it's important to be aware of consumer culture if you're going to buy or sell stocks.
- Keep on top of news regarding both big-name businesses as well as national financial conditions, both which tend to drive the stock market for better or for worse.MarketWatch: Biggest one-day stock moves linked to central bank actions, corporate news (April 23, 2008)
- You should also keep an eye out for companies which introduce savvy new products, convenient new services, brilliant new discoveries—anything that seems like a winning idea could make for a winning investment.
- Follow Your Beliefs
- Though the stock market is mainly driven by the profit motive, the movement of shares is occasionally driven by conscience as well. Many investors will make an investment in and buy shares from companies which reflect their political beliefs, or abstain from those which don't.
- When you buy stock in a company, you're not just going along for the ride. You literally own part of whatever companies you invest in, and the capital you provide could help make it a success.
- To search for shares in companies which are consistent with other causes that may interest you, try Googling the cause (pro-life, pro-choice, breast cancer, etc.) and the phrase "listed companies." Write down the names of the companies that interest you for whatever reason, not just environmental or social ones.
- There are also plenty of online resources which gather stock information for users interested in a particular niche of companies. For example, these two sites list environmentally conscious "green chip" companies on the stock market:
- EcoBusinessLinks: EcoBusinessLinks Green Stocks, Green Energy Stocks, Etc.
- SustainableBusiness.com: Green Investing - Green Stock Watch
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 in studying before you dive into stocks and shares.
Analyzing the Market On Your Own
- For a detailed explanation of DIY stock assessment, make sure to consult The Motley Fool's introductory guide on analyzing stocks.The Motley Fool: Investing Strategies: Your First Stock (May 30, 2008) But for a general overview of the best techniques for sizing up stocks on your own, here are a few good tips for using the Yahoo! Finance stock tracking service:
- Go to Yahoo! Finance and enter the name of a company on your list in the field labeled Get Quotes.
- NOTE: To learn how to interpret all the information in a Yahoo! Finance stock quote, make sure to consult Mahalo's completed guide on How to Read the Stock Market. For the purposes of choosing stocks, we're only concerned with a few aspects of it.
- When your desired quote appears, make a note of the ticker symbol-- a one- to four-letter abbreviation of the company name that's used to identify it on the market and in financial settings.Wikipedia: Ticker symbol It's important to write it down for future use.
- Make sure to look for the price of one share of stock. Its current price is listed as Last Trade.
- This is your first gauge as to whether or not to investing in a particular company's stock is a good idea for your personal financial circumstances.
- For example, a single share of can go for anything between a dollar and several hundreds of thousands.
- Plan your investment according to how much money you actually have to spare.
- The Change field will tell you how much the shares gained or lost today.
- Locate the Chart function, which will display a single stock's performance in a visual format. (See screenshot at right)
- NOTE: The links beneath the chart provide an option for viewing the stock's performance anywhere between the past five days and the past five years. Visualize a range of different time spans in order to get a feel for the shares' recent and long-term performance.
- Note the stock's one year target estimate (displayed as: 1y Target Est.)
- This figure reflects the price of individual stocks, as projected by market analysts, for one share, one year from now.Investopedia: Price Target Definition
- Remember that this is a mathematically-predicted value, and that market analysts can often be wrong.Who's Wrong: Accountability for prediction makers
- Note the Price/Earnings ratio (displayed as: P/E)
- The P/E ratio is used to project the earning potential of shares in a particular stock-- essentially a rough estimate of its "bang for the buck"-- based on its current market price.
- Companies for which stock has a higher P/E ratio (generally, 25 or more) are considered to have high expectations, while stock with a lower ratio (under 20) are not expected to do anything spectacular.Investopedia: Price-Earnings Ratio - P/E Ratio Definition
- Despite the relatively simple concept behind the price/earnings ratio, it can be a tricky gauge to rely upon since low-ratio investments can sometimes be a more dependable investment than high-ratio ones. For an explanation of P/E ratio, make sure to consult the Motley Fool's How to Use the P/E.
Reading Third-Party Stock Analyses
- While it's undeniably important to do plenty of your own legwork in researching current and prospective investments, it also pays off to compare, contrast and sometimes heed the advice of a number of sources on stocks and general investment. And while you should never forget to remain critical of anything you read, here are a few generally-reliable sources for stock news and research tools:
- InvestorGuide.com's stock lookup service service feature provides capsule analyses of different individual stocks and lists important trend information, including recent price history and news.
- Yahoo! Finance's Stock Research Center is a portal to all sorts of free stock research tools, and also provides a capsulized news/information summary service similar to InvestorGuide.com.
- Forbes.com's Markets section is dedicated to stock and investment information, and provides a quick quote service. Just punch in a company's ticker symbol into the dialog box on the right side click on Get Quote. The Buy/Hold/Sell Analysis option is particularly interesting if you're looking for a quick rundown on a particular stock's health.
- In addition to its free content, The Wall Street Journal's online edition includes an optional subscription service. This premium package offers detailed profiles for many companies-- big and small-- complete with firsthand news reports and analysis from the WSJ staff.
- Of course, news is news, and you don't necessarily need to rely on other sources to aggregate information for you. It requires a little more elbow grease, but you can dig up your own sources for news and information on the stock market and potential hot investments on the horizon. Here's how:
- Run a search for the ticker symbol and the word "analysis." For example, try entering AAPL Analysis into Google.
- The first page of results should include a few written assessments of the stock shares, tracing their performance thus far and speculating on future stats.
- Make certain to note the publication date for any article you find. If it's outdated, be aware that it may no longer apply.
Full Service Brokerage
- Investing with a full service brokerage like Merrill Lynch or Morgan Stanley Smith Barney advising you means that you're essentially flying first class. You get all of the amenities, which may include a host of features that you may not need. And of course, you will pay fees accordingly.
- The Benefits
- You're assigned a personal broker to advise you on the best investment right now and who will sift through analyses of different stocks, rising shares and other market trends so you don't have to.
- If your broker is particularly good, he or she will work extremely hard to grow your investment.Salary.com: Full-Service Brokers
- Your broker may also provide guidance on subjects related to your investment, including tax advice and retirement planning.Investopedia: I'm new to this. Can I sell or buy stock by myself?
- The Benefits
- Drawbacks
- Full service brokerages charge high rates for transactions on stocks (generally around $150), as well as extra annual fees and other regular fees.The Motley Fool: What's Wrong With Full-Service Brokers? (December 21, 2007) If your initial investment isn't very large, this could easily eat away at your net earnings.
- The broker assigned to advise you at a full-service brokerage receives commission for every trade you make, a factor which may bias the advice that you receive.The Motley Fool: What's Wrong With Full-Service Brokers? (December 21, 2007)
- Drawbacks
- If a full-service brokerage sounds like your kind of thing, there plenty of currently-active brokerages are available on Yahoo! Directory's Full Service Brokerages section.
Discount Brokerage
- Discount brokerages like E*Trade and Scottrade give you the basic tools you need to start your investment. 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 trading shares is dramatically less per transaction.Google Books: Get a Financial Life, by Beth Kobliner (p. 146) And since you directly govern when or when not to make a transaction, that's likely much more investment money in your pocket.
- The minimum investment is much lower-- and sometimes not even required!-- than what is required at full-service brokerage.The Motley Fool: Getting Started with Brokers
- Many discount brokerages also offer an online kit of useful stock analysis tools that will supplement the free resources discussed earlier in Step 2.
- Benefits
- Drawbacks
- Discount brokerages require you to stay on top of your own stocks and 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, you might not be able to optimally manage your corral of investments.
- Drawbacks
- 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 some companies, with no broker involved.
- Benefits
- Because there's no intermediary, the cost per stock transaction is minimal-- possibly as little as $2!Bankrate.com: How to Buy Stock Directly from the Company (July 18, 2000)
- Drawbacks
- Unfortunately, your options are extremely limited since only a small fraction of the companies listed on the stock market offer direct investment plans for shares in their stock.
- For a comprehensive list of those that do offer shares for direct investment, visit The Direct Purchase Plan Clearinghouse.
