Do you want to venture into stocks trading? Read this article on how to buy stocks for beginners.
How to Buy Stocks for Beginners?
Stocks are equity investments that allow an individual to earn from a firm. It is rather common for people to invest in shares these days. It is common for people to make mistakes while investing in stocks for the first time. However, you can invest in stocks as a beginner without making mistakes.
All you need is the right information. Before you invest in stocks you should know the basics of investing in stocks. The first step is to identify your investment style. You can decide to do it yourself or get someone to manage your stocks.
- Open a brokerage account
Opening a brokerage account is similar to opening a bank account. You will need to complete an application form and provide proof of identification. You will also need to indicate the method you will use to fund your account. The are two common options for funding your account. You can decide to mail a check or to transfer funds electronically.
The next thing to do after creating an account ID to find a stockbroker who is worth your investment. When you are looking for a broker, you should consider the following. You should think about the amount you have. Brokers have minimum requirements with regards to the amount you can invest.
You should choose a broker whose minimum requirement is less than what you want to invest. Some brokers have a $0 minimum requirement, however, some brokers can go as high as $2000. The next thing is the frequency of trading. Brokers charge commissions for trading. If you intend to trade more (more than 10 trade in a month), you should look for brokers with low commission costs.
You should also think about the support you need when you choose a broker. Some brokers offer 24-hour support services and they are accessible via phone, mail, and even online chat. Some brokers also provide investment guidance and educational tools for their customers. Since you are a beginner, you should get a broker who will offer you maximum support.
- Set a budget
You should decide on the amount you want to invest. Usually, the number of shares you can buy depends on the price of the shares. However, the amount you will decide to invest can depend on the price of the stock.
- Select your stocks
You will now need to decide on the type of stock to invest in. This is where you need to conduct thorough research to know where to invest. You can start by looking through the annual reports of potential companies. You can focus on the management’s letter to shareholders.
This letter will give you a report of the current happenings in the company. You will find the tools you will use to analyze most of the data on your broker’s website. After comparing the analysis, you can choose the companies you will want to invest in.
- Decide the number of shares you want to buy
This depends on the amount you are willing to invest. It is advisable to start with small purchases. You can increase your shares over time.
- Start Investing
You should stick to the basics, however, try to adopt any strategy that you think will work for you. Many people advise that you should choose a single stock if you are confident about the performance of the company.
Difference Between Stocks and Stock Mutual Funds
The stock mutual fund, also known as equity mutual fund allows you to invest in several small pieces of stocks in one transaction. The companies are placed in a pool and if you invest, you will be investing in several different companies. Individual stocks or stocks, on the other hand, allows you to invest in a single company. With this, you can start with small investments to see how it will go.
Basic Investment Terms
Ask is a term used by buyers. This is the price that sellers are willing to accept for the stock.
Bid, on the other hand, is the price at which buyers are willing to pay for the stock.
- Market Order
This is a request to sell or buy a stock at the best available price as soon as possible. With market orders, there are no sale parameters and your order will be completed in minutes or even seconds. One thing about the market order is that the transaction will not be sold or bought at the price you quoted. This is why it is advisable not to use the market order in selling or buying stocks with a wide price range. A market order is useful to buy-and-hold investors. To them, small differences in stock prices do not matter. They are particularly interested in ensuring that the trade is executed.
You should also note that when you place a market order after the market closes, the order will be placed at the prevailing price when the market opens the next day.
Spread is the difference between the highest bid price and the lowest ask price.
- Limit Order
A request to buy or sell a stock at a specific price or higher. If you want control over the price at which your order is executed, you should opt for the limit order. For instance, if a company is selling stocks for $200 and you will like to buy the stocks at $190, you can place a limit order on your trade.
The broker will only buy the stocks when the price drops to $190. In the same vein, when you are selling at a price with a limit order, the broker will only give out the shares to the person whose price matches with the price at which you are selling it.
Limit orders are helpful for small companies whose stocks are likely to experience wide price ranges. Even though a limit order guarantees the price of the stock, there is no guarantee that the stock will be executed. If the limit order is not executed on the same day, it will be filled over subsequent days until it is fully executed. However, transaction costs will be charged on each day a trade is made. If the trade does not reach the targeted limit until the expiring date, the order will not be fully fulfilled.
- Stop Order
This is the price at which a limit is placed. When the price reaches a certain price, a stop order will be issued and the remaining stock will be sold at the prevailing market price. In the case, a market order will be executed after the stop order.
When you decide to invest, you should keep these simple tips in mind. You should start investing in safer stocks. There are companies that are bound to break even, even if the returns will be in the long term, you should consider such companies. This is why it is advised to make small investments first. When you see the performance of the investment, you can decide to add more or not. Even though this is not a sure way to test the performance of a company, it can help you make a decision.
You should also aim at reducing the fees. Fees can take away a considerable chunk of your money if you are not cautious. You should check for avenues to reduce the fees you pay on transactions. Some fees to watch out for include trading platform fees. This fee ranges from $50 to $200.
You may also be charged annual fees and inactivity fees. You should also not look at the reputation of the company only. Some companies are top companies but they do not offer good returns on investments. Do not aim for companies with an extremely high price-to-earnings ratio. Focus on companies with low price-to-earnings ratios compared to their industry average.
You should avoid making investments that will involve complex algorithms and technical decisions. You should stick with simple and easy to understand investments. Go with something you are familiar with. in the end, even if you follow the basics and conduct a lot of research before investing, you may encounter some hitches. Even pro stock investors still encounter problems. You should continue to learn more to make you more confident about your investments.
You should also set some rules for yourself so that you do not panic when other people are panicking.