Some people might find it risky to invest in stocks because of the process and the amount of capital required to start. The key to success as a beginner is to be teachable, interested, and committed to learning. You’ll know if it’s right for you along the way.
What makes stock investment simple for beginners? More and more institutions are offering brokerage accounts, which allow you to buy and sell individual stocks, stock funds, and a variety of other investments, as well as a variety of services to assist you. However, for a beginner investor, all of the options can be daunting. I’ll walk you through the actions you need on how to invest in stocks.
3 Steps on How to Invest in Stocks
Step 1: Decide How You Want to Invest
You buy or invest in stocks through a brokerage house, either by opening a traditional account and placing your orders by telephone or in person or by opening an online account and trading electronically.
When you work with a brokerage firm either directly or electronically, you give the order to buy, including the number of shares. Typically you buy in increments of 100 shares, or what is known as a round lot, and your cost is the price per share times the number of shares. You will pay a commission based on the amount of the trade or the number of shares, though some electronic trades have fixed commissions, usually for the first 1,000 shares of any one stock you buy.
Take Note of The Price When You Invest in Stocks
A stock’s price is determined by what investors are willing to pay for it. If the market as a whole is doing well and/or the issuing company is profitable, the price tends to increase. If the opposite is true, the price tends to decline. There is no accurate way to predict what those changes will be, especially in the short term. Over time, the general tendency has been for stock prices to increase.
Sometimes if the price climbs higher than the issuing company thinks investors will pay, they
do a stock split to increase the number of shares and lower the price per share. For example, if you owned 100 shares of a stock trading at $100 a share, in a two-for-one split you would end up with 200 shares trading at $50.
The Value of Stock
There are a number of ways to evaluate a company and its stock before you buy, including the patterns of sales and earnings, its debt, and the stock’s price-earnings ratio, or p/e: its current stock price divided by its earnings.
Some experts argue that a P/E much higher than the market norm- currently around 25 means the company may have a more difficult time producing a large enough return to increase in value. On the other hand, some very successful companies, including technology companies, have very high P/E ratios.
The Impact of Size
One of the choices you make when you buy a stock is the size of the company you decide to invest in. There are three main categories, based on their capitalization, or the total value of their outstanding stocks.
- Large Capitalization, or large-cap, companies are widely analyzed and frequently traded. They tend to grow more slowly than smaller companies and their prices may be higher.
- Mid-Cap Companies offer the potential for faster growth but may be more difficult to track for performance information.
- Small-Cap Companies, generally younger companies, could grow dramatically but have fewer resources to survive a downturn. It may also be harder to find information to help you analyze their performance. Very small companies called micro-caps may also be thinly or infrequently traded, which could make them hard to sell.
Traditionally most investors look for directional opportunities. In other words, they are looking to buy a stock at a low price and sell the stock at a higher price in order to make a profit.
However, you can also sell a stock at a high price (even if you do not own the stock) and buy the same stock when it goes to lower prices in order to make a profit (this is shorting a stock). This presents opportunities to profit whether markets rising or falling.
Step 2: Choose an Investing Account
Having an investing account is required to invest in stocks and this normally involves a brokerage account.
A brokerage account is a type of investment account that allows you to purchase and sell stocks. A brokerage account can be opened at a variety of regulated brokerage firms, ranging from full-service stockbrokers to low-cost online brokers.
It is similar to a bank account, in way that you can transfer money in and out of your brokerage account, but unlike banks, brokerage accounts provide you access to the stock market and other investments.
Step 3: Plan Your Budget to Invest in Stocks
Consider how much investing support you want and are willing to pay for after you’ve chosen the correct type of account for your goals. Managed accounts come with professional financial advice and guidance, as well as increased trading and account fees. So it’s really important that you take note of those.
Robo-advisors, which are software programs that help you choose investments based on data you provide about your goals and risk tolerance, are available with some online brokerage accounts.
How Do We Actually Pick Stocks to Invest In?
I think it’s best to get a recap of the Stock Investment Basics before I go ahead and explain further:
- Stocks represent a portion of a company’s ownership as well as its earnings.
- Experts advise against investing in something you don’t FULLY grasp, no matter how new you are now or how experienced you become.
- Dividend payments and selling shares at a greater price than when you bought them are two ways to make a profit from stock investments.
- Risk Management is a Must.
Consider your risk tolerance before you start to invest in stocks. Large, well-established corporations (sometimes known as “blue-chip“) have lower risk than smaller or fast-growing companies. Blue-chip stocks are commonly recommended as good initial stock options for new investors because they come from well-known corporations.
Blue-chip companies are known for their balance and stability, as well as moderate growth and dividend income.
Most professionals recommend delaying investing in small company stocks until you’ve gained more experience as an investor because of their higher volatility. Also, take note of the changes or updates as you select your investments.
Procedures for Buying and Selling Stocks
After you’ve decided which stocks to invest in, you’ll need to choose an order type to invest in stocks (buy or sell). Without further adieu, here are two basic types:
- Limit order: A limit order instructs your brokerage to purchase a particular quantity of shares at (or below) a predetermined price at a future date. A limit order’s price must be equal to or less than the current market price, so there’s no certainty that it’ll be filled until your conditions are met.
- Market order: This instructs your brokerage to purchase a stock at the current market price. When prices are continually fluctuating in fast-moving marketplaces, market orders can be dangerous. A market order has the advantage of being executed swiftly.
Here’s a 5-minute video that will help you differentiate order types when investing:
My Final Thoughts
The good news for you guys is that the most profitable strategies on how to invest in stocks are frequently the most basic. Setting up the correct brokerage account and focusing on goals and risk tolerance and other important reminders are the next steps to successfully investing in the stock market.
Let me know your thoughts and questions about this article and I’d be glad to answer them.