Buying stocks can be intimidating, learn the best tips and practices you need to apply when purchasing these investments.
Contrary to popular belief, buying stocks is not the very first step to getting started in the stock market. The first step is understanding what are stocks and how they work. This is a crucial first step that will shape your investing career going forward. Once you have mastered the theory side to stocks, and have had plenty of practice playing a stock market game, you are then ready to begin actually purchasing stocks.
The place where you can buy or sell shares is called the “stock exchange.” In the U.S., there are three major exchanges: the American Stock Exchange (AMEX), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the New York Stock Exchange (NYSE), which is located on Wall Street in lower Manhattan in New York City. These various exchanges provide a place where buyers and sellers come together to buy and sell shares, which allows for liquidity and helps ensure that sellers get the highest price possible and buyers can buy at the lowest price possible.
Generally, the more shares trading hands every day, the higher the liquidity. Stocks with low liquidity hold increased risk due to the possibility that an investor may be stuck with a stock of which the price is declining and no one to sell the stock to. If you owned 1,000 shares of Apple, but couldn't find anybody willing to buy them, they would essentially be worthless. Understanding how the exchanges work is extremely important to buying your first stocks.
Steps To Start Buying Stocks
Taking a leap into buying stocks may seem like an intimidating task but once you jump in, you are opening up a wealth of investing opportunities. The more often the process is done, the better you'll get at buying stocks in a timely matter. To optimize your performance in the stock market, follow this step by step list.
Eliminate consumer debt, especially high interest debt
While trying to avoid focusing too much on the personal finance side of buying stocks, this is a crucial first step that cannot be ignored. There is no reason to be purchasing stocks if you carry a balance on your credit card, line of credit, or any other high interest debt product. The stock market returns on average 7 percent per year, well below the 18-22 percent you're likely paying for those credit cards. So instead of putting your money in the market, put it towards paying off your debts.
Thoroughly research online brokers
There are so many options out there, offering a variety of different pricing packages. You should spend almost as much time researching brokers as researching the actual stocks you will buy. Make sure to look at various review sites that compare the popular options and find the one that best suits your investing needs/goals. With the recent digital advancements on Wall Street, chances are you will be using an online broker.
Explore the brokerage site to get comfortable with it
If there is a virtual tour, even better! Chances are you will be making all your trades electronically and not talking to a real person, so make sure you are comfortable with that (most brokerages charge higher trading fees for talking to a real person via their phone line to place orders). The site will likely even offer a research platform to get real-time quote and in-depth information on companies. This will help you in researching your companies and make better investment decisions.
Deposit funds into your account
If the brokerage is not an arm of your regular bank, you will have to transfer money into the account separately. The brokerage should have a foot note on how to carry out this process. Take note of minimum required deposit (if any).
Understand order types before you buy
There are different types of order options available for investors. The simplest type of order used is the market order, which purchases the stock at the current bid/ask price. Other order types include limit buy, limit sell, stop buy, and stop sell.
Place your trade
Regular stock market hours are Monday to Friday from 9:30 a.m. to 4 p.m. Eastern Time. If you have placed a market order, it shouldn't take too long to fill. Take note of the price your trade was filled at.
Monitor your stock, but not every day
In fact, Warren Buffet says to buy quality companies and don't watch them too closely. By doing so, you avoid getting emotional about the inevitable ups and downs of holding stocks and reduce your inclination to frequently trade your stocks. Money is made in the stock market by investing, not by trading.
9 Tips To Buy Stocks Like a Pro
Have a well-thought out investment strategy
Value investing, growth investing, and using technical analysis are the most common investing strategies. Some investors prefer to stick with one strategy they are comfortable with, others like to combine different strategies in their portfolio. With each stock purchase, it is essential to know why you bought that stock and stick with it.
Assume the right amount of risk
Buying stocks involves a risk versus reward trade off. Not every stock presents equal risk. Generally, the higher the market capitalization (price per share X number of shares outstanding) the lower the risk and vice versa. Note the amount of risk you are looking to take and ensure to avoid over exposure.
Time is your friend – be patient
Over long periods of time, stocks have proven to be a very valuable investment because of their very good returns. Over the last 100 years, stock have gone up on average about 7.5%. Peter Lynch has said that some of his best performing stocks are ones he's held for 6-8 years.
There are no guarantees
Despite what late night stock guru's might try to tell you, there are no guarantees. Investing is risky and uncertain. That is why it is rewarded accordingly.
Past performance doesn't forecast the future
There is a reason a similar disclaimer is included in almost every bit of investment advice: it's true! While history can provide a great deal of insight into the probability of certain events, it cannot forecast future events.
Diversify, diversify, diversify and diversify some more
Geographically, by industry, by asset-class
Never stop learning
Learn everything you can about how the stock market works and stock market investing basics. Understand the industry and use online resources to your advantage. Knowledge is power, especially when it comes to buying stocks.
Don't be afraid to be a contrarian
There are times when the masses are wrong. Fortunes can be made by understanding when to roll with the crowd and when to go it alone. Remember, The Big Short?
Don't be that guy
You know, that guy who brags about his massive gains, but never talks about his losses. We all know someone like that. Sometimes, investing in the market is similar to poker, hold your cards in tight and keep your mouth shut.
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