There are many ways to invest your money today. The stock market offers both high returns and steady income but is not without risk. Here are some of the basic steps to consider when investing in stocks.
How to Buy Stock – A Beginner’s Guide
- Research Stocks
- Choose Stockbroker
- Pick Stocks to Buy
- Decide How Many Shares to Buy
- Place an Order
- When to Invest in the Stock Market
- Diversification and Portfolio Management
- Tax Considerations
Stocks and shares represent ownership in a company. An investor can own one share or many shares of a company’s stock. There are many reasons a company would sell shares of ownership to the public. In order to raise financial capital, a company typically must take on debt through loans or by selling equity ownership.
1. Research Stocks
The percentage of debt and equity in a company’s capital structure can reveal a great deal about how the company operates. High debt can make it harder for the company to pass on profits to the owners and shareholders. It is important to note that if a company fails and shuts down, investors may get paid last, if at all. This is part of the risk inherent to investing. A stock price can also fluctuate unpredictably due to a variety of causes. Despite the risk, many investors are able to successfully invest and make reasonable returns on their investments.
The stock market consists of multiple exchanges and markets which issue, sell, and buy stocks of publicly traded companies. The top stock exchanges in the United States are the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). You can find exchanges in many countries, such as the London Stock Exchange and the Tokyo Stock Exchange.
When a company sells ownership in the form of stock, the shares can be sold through an underwriting process to larger financial institutions in an initial public offering (IPO). These shares of stock may then be traded on the secondary market through exchanges like the NYSE and NASDAQ, which is where individual investors can participate. As an individual investor, you can choose from a variety of investment options and investment vehicles. You could invest in a single company or an index of the entire industry.
Before investing in a company, do some research. Thanks to services like MarketBeat, this is very easy to do. For example, if you’re interested in Tesla stock, you can research the company by visiting the Tesla stock page at NASDAQ:TSLA. Interested in cryptocurrencies? Be sure to study a cryptocurrency screener first. When researching, one issue you may have is that there is almost too much information. There is so much data available about companies, individual stocks, markets, trends, and predictions that it can be hard to analyze it all. Finding a trusted source of information becomes very important in order to get the right info at the right time. Consider joining a well-established market research provider, like MarketBeat, which is endorsed by organizations such as the Wall Street Journal and CNBC.
2. Choose Stockbroker
Once you’re ready to buy stock, it’s time to find a stockbroker. A broker is someone who buys and sells on behalf of a client. A stockbroker will buy, sell and trade stocks through an exchange on behalf of the investor. Keep in mind that there are ways to invest without a stockbroker, such as through Robinhood, an online and app-based platform that uses a commission-free business model. Also, many companies offer stock investment options to their employees, and a brokerage is not required in that circumstance.
Generally, stock brokers are required to achieve a certain level of education. They must pass exams, obtain licenses, and register with regulatory agencies. The Financial Industry Regulatory Authority (FINRA) oversees the General Securities Representative Exam (known a Series 7) which a stock broker is usually required to pass. A stock or security broker may also be required to register with the Securities and Exchange Commission (SEC). Additionally, a brokerage may also need a license from a state regulatory authority.
FINRA keeps track of over 634,000 brokers across the county and offers a web tool that lets you check if a broker has a valid license. When establishing a brokerage account, you will be required to provide personal information, such as your Social Security Numbers (SSN), physical address, employment information, annual income, and more. Before submitting any information or money to a brokerage firm or individual, be sure to check their validity.
Something to keep in mind is that security brokers earn commission on trades, fees, and by selling products. You can generally find performance information on stockbrokers, including ratings and reviews online. Who you choose as a broker may depend on your investing goals and desired time frame. Commissions and fees diminish your returns, but discount share brokers may come with hidden costs and risks as well. Carefully consider your options before deciding on a broker. MarketBeat includes brokerage performance rankings and other helpful information as part of their Premium and All Access subscriptions.
3. Pick Stocks to Buy
Determining which stocks or securities to buy is a process that varies by investor, broker, and trader. Your investing goals play an important role in this decision. Depending on your situation, it may also be wise to consider your retirement plan and how you want to disperse your estate at the end of your life.
Why should you consider these future events? You can minimize your tax burden drastically by making investment decisions that take advantage of important tax laws. Remember that you will be taxed on the income earned from stocks. It is important to understand that the type of stock you buy has tax implications.
There are many types of stocks. A company will determine its plan for sharing stock and dividends as part of its overall objective. Some companies offer an incentive to buy their stock by providing periodic payments to shareholders from a percentage of the profit. This dividend rate per share is set by the company and can also be seen as an indicator of performance. An investor can choose many stocks with this feature to establish monthly income from the dividends. However, taxation occurs when income is realized. You can use MarketBeat’s dividend stock screener to compare the dividend yield and payout ratio between stocks.
In contrast, other companies do not issue a dividend and instead reinvest all profits back into the company in order to grow. These growth stocks are bought low and sold high to make a profit. Because these stocks may be held for a long period of time before any income is realized, they often see lower tax rates.
To make matters more complicated, you can also buy stock options, which is the option to buy a number of shares at a certain price by a specified time. You must pay a premium to obtain the stock option and this premium is non-refundable if you choose not to exercise the option by the due date. Keep a close eye on stock analyst ratings. A stock option is great if the price of the stock goes up because it becomes worth more to the investor. However, if prices go down, the investor would only lose the premium paid per share.
4. Decide How Many Shares to Buy
Once you have decided which stock or stocks to buy, you have to decide how many shares of stock you are going to purchase. An important concept here is diversification. It’s a good idea to spread out your investments to minimize the impact of losses. You can do this by buying small quantities of shares from a variety of different companies in different industries. You may also want to consider your investment goals and future plans. The money you invest may not be easily withdrawn at a moment’s notice. Depending on the investment, early withdrawals could be penalized and have tax consequences.
A good rule of thumb is to only invest what you can afford to lose. History has taught us how quickly a great investment can turn into a substantial loss. One common strategy is to invest extra funds from promotions or bonuses into an investment account. You may be able to set up a retirement account investing in the stock market. Many employers also offer stock purchase programs for employees which allow an easy way to start investing.
Important note about stocks: You can often receive additional privileges, depending on the level of your investment. Generally, whoever holds over 50% of the shares has controlling interest in the company. This person or group of people can then veto or overrule the board members of the company, as well as make other changes. Depending on what percentage of the common stock shares an investor owns, the company may be required to obtain permission or notify the investor before making major decisions. Some stocks, such as preferred stocks, do not come with voting rights, but they may include preferential treatment and dividends that common stocks do not. Companies may also off stock buyback programs if they believe their stock is undervalued.
5. Place an Order
To place an order, you must first establish a brokerage account with a stockbroker or brokerage firm. You can find a variety of online discount brokers, but always check their ratings and reviews as well as verify they have the appropriate licenses and registrations. And be sure to find out ahead of time what fees and commissions will be charged. Some brokers have a minimum amount needed to invest, which can range in the thousands of dollars. Generally, you can open a cash account with the broker, though some brokers or brokerage firms may offer margin accounts. Through a margin account, the initial money is loaned to buy the stocks, but it can come with a catch. For example, the broker may collect on any amount owed at his or her discretion.
There are also a variety of orders that an investor can place, such as a market order and limit order. A market order is an order to sell or buy a stock right away. This may not be at the currently listed prices but instead will be the price at the time the order processes (which may be different).
In contrast, a limit order is used to buy or sell stock at a specified price. This allows an investor to set up orders to take effect when the price of a stock reaches a certain point. With a cash account, you would then be required to have the funds available at that time. On the other hand, a margin account may allow the order to process as soon as the conditions are met, regardless of how much of your funds are available at that moment. There are also other types of orders, such as stop orders or buy stop orders, which offer more control over how and when orders are processed.
6. When to Invest in the Stock Market
As a general rule, it’s always better to invest early rather than late. While you may want to consider current market conditions prior to investing, generally the stock market has shown steady increases over time. With careful investing practices and the use of professional market information from a trusted source, you’ll be on your way to success.
You may hear people characterize the stock market as either currently a bull or bear market. A bull market is one classified by optimism and rising stock values. In contrast, a bear market is classified by dropping values across the board. A general principle in stock trading is to buy low and sell high in order to maximize earnings. However, the variety of options available in the stock market also allows one to make money in a bear market, although those strategies may be more advanced.
Another method of determining when to invest in the stock market is to be aware of local and global factors that will impact stock prices. For example, consider the humble macadamia nut from Australia which is also grown in Hawaii. A sudden increase of an insect population could damage the supply of macadamia nuts from Australia, which would sharply increase demand of the nuts grown in Hawaii. This increased demand could likely lead to an increased share value of Hawaiian companies. A savvy investor who is paying attention could use this information to invest in the appropriate companies prior to the demand increase and subsequent value increase.
The end of the year or the beginning of a new year may also be a good time to invest, especially if you can reap extra tax benefits from meeting yearly contribution limits. While it may be hard for a new investor to get in on an IPO, it is possible to obtain those shares once they start trading in secondary markets. One way to bypass this is to obtain shares from insiders of the issuing company. Insider trading is illegal when the associate has information that the general public does not, since it would impact share price. However, there are legal ways for a corporate insider—like an associate, employee, or manager—to sell shares to an investor. Some investors are also clients of underwriters and may receive a chance to buy shares from an IPO before other investors. Because of this, be wary of IPOs because there is usually no track record of the company’s success and the share value may be speculative.
7. Diversification and Portfolio Management
One main strategy for minimizing losses when making investments in the stock market is to invest in smaller amounts of shares from different stocks in dissimilar industries. This is known as diversifying, and the collection of shares is the investor’s portfolio. To goal is to spread out your investments so that a failing company does not wipe out everything you own.
You want to choose companies from different industries so that a negative event (such as the weather) will not wipe out all of your investments. To diversify even more, you can also invest across exchanges, or even in stock markets of other countries—although other countries may have different rules and regulations that must be followed. You could also focus on dividend investing to receive the return on investment rather than wait for the stock value to go up.
Diversification reduces risk. If you would rather not research multiple stocks, you can instead look into index or mutual funds, which use the pooled funds from multiple investors to buy a portfolio of stocks. This may also be a good option for investors who want to start with a smaller investment and explore the stock market. Portfolio management is all about managing risks and knowing when to buy or sell certain stocks to maximize returns and limit taxes and fees.
8. Tax Considerations
There are many ways taxes come into play when investing. You are required to report all income earned, including gains from investments—and taxes are due when they are accrued. Generally, most taxpayers can pay their taxes owed when filing income taxes every year. However, those earning over certain amounts may be required to make periodic quarterly tax payments or face penalties and interest from the Internal Revenue Service (IRS). Those who have many investments that earn income in any given year may also see an additional tax called the Net Investment Income Tax.
Typically, the longer an investment is held, the better the tax rate. Quick trades do not qualify for lower tax rates and earnings from these capital gains will be taxed as ordinary income. Capital gains on assets held over a year qualify for the long-term capital gains tax. At a rate of 0%-20%, this often results in you paying lower taxes than if the income was taxed as ordinary income.
Retirement accounts can also be set up to allow investing in the stock market. This can significantly impact your future and should only be done with great care. With retirement accounts, you can use pre-tax dollars to invest in stocks, which will allow the funds to compound over time tax-free.
Should a Beginner Investor Buy Stocks?
Yes, if you are interested in buying stocks you have come to the right place. It’s easy to trade across a multitude of platforms, and a beginner can quickly get started gaining experience as an investor. Every successful investor started as a beginner and learned the ropes. MarketBeat is here to provide information and valuable services to help you on your journey.
There are several regulatory agencies and watchdogs that work to protect investors from unscrupulous investments. For example, the U.S. Securities and Exchange Commission (SEC) prevents fraud, uncovers illegal schemes, and investigates insider trading and other crimes. The SEC also requires companies to register securities and provide important financial information so investors can make informed decisions. There is also recourse for investors who lose their money through inaccurate reporting of this information. To minimize risk, a beginner could start with an exchange-traded fund or index fund that is managed by an experienced professional.
How to Buy Stock
Buying stock may seem complicated at first, but it can be a rewarding experience. There are many ways to invest and trade, and many different stocks for you to choose. Before buying stocks, a beginning investor should first research the individual stocks and related industries. Use an online resource, like MarketBeat, to access a variety of tools and information.
Next, you must choose a stock broker or brokerage firm to buy and sell stocks on one or more of the stock exchanges. Once you have decided which stocks to purchase and the number of shares, place an order with a broker through your brokerage account. You will be required to provide personal and financial information, so be sure to check the broker is valid and up to date on required licenses and registration. You can check with the regulatory agency FINRA for more about a broker or brokerage firm.
There are always options to invest at any time in any market. Generally, the stock market is performing better in a bull market and worse in a bear market. Diversify your portfolio to reduce the risk of losing your entire investment. Be sure to consider your personal financial goals as well as retirement, taxes, and estate plans to maximize the efficiency of your investments. Regardless of where you are on your investing journey, MarketBeat has resources that can help you succeed.