Have you been thinking about investing in the stock market? If you’re like most new investors, you may be unsure where to start. And, like all investors, you don’t want to lose money.
Don’t worry, we’ve got your back today.
We’ve created this simple, step-by-step guide teaching on how to buy stocks for beginners.
How to Buy Stocks for Beginners
Investing in stocks is one of the easiest ways to profit and accumulate wealth over time.
Most members of the Forbes 400 list of the wealthiest people got there by investing a large number of shares in the stock market. You may not be a Wall Street tycoon, but you can start small, and build a very lucrative portfolio of stocks.
Follow this guide to discover what stocks are, how they work, how you can limit your losses and more.
What Are Stocks?
Stocks are a type of investment which gives you a share of ownership in a company.
Stocks are also called “equities,” because they represent an legal equity in a company.
Stocks have one more name. They are often referred to as “securities” because they are a type of financial security investment.
There are two types of stocks:
1. Preferred Stock
Preferred shareholders receive their dividends before common-stock shareholders.
Preferred stock is typically a mix of an aggressive investment, the stock, and a conservative investment, a bond.
As such, these stocks are especially attractive to risk-averse investors. The stock’s price does not fluctuate as much as the price of common stock.
2. Common Stock
Common stocks are what people are talking about when they simply say “stocks.” These stocks are generally more popular than preferred stock because they possess the potential for greater returns.
Common stockholders are not guaranteed dividends, depending on how management decides to distribute profits. And if the company goes under, these investors must wait until preferred stockholders receive their assets.
For this reason, you may think preferred stocks are better than common stocks, but that may not be the case. It depends on your comfort level with risk.
Most people prefer common stocks because of a greater ability for price appreciation and, thus, greater returns.
Common stocks are what most people buy, and for this reason, when we discuss stocks for the rest of this guide, we’ll be referring to common stocks.
Set a Budget and Stick To It
Before you start investing, it’s very important to set a budget that fits within your financial situation.
Once you start investing, it’s very easy to get the bug and want to invest more heavily.
How much money do you need to start investing in stocks? It depends on the share price of an individual stock. Share prices range from a few dollars to over six figures.
How much should you invest? You should only invest disposable income you can afford to lose.
When it comes to your investment portfolio, many experts advise the following:
- Invest no more than 10% on common stocks
- Invest 10% in bonds.
- Invest 80% in mutual fund stocks.
More important than how much you invest is how often you invest. Consistency is the key.
Think of your portfolio as a rolling snowball, gradually getting bigger as it builds upon itself. Each time you invest and reinvest your earnings, you are building a bigger and more profitable portfolio.
The interest earned on your investments compounds over time until your portfolio is a force to be reckoned with.
How To Start Investing in Stocks
You will be charged for each trade you make but it’s very affordable, less than $10 per trade in most cases.
Do a Google search for the best online trading sites and choose the best one for you. Evaluate brokers based on:
- Costs – trading commissions, account fees (Ally Invest is a great low-cost option). Keep it simple and look for brokers who offer flat-fee trades.
- Investment Selection – Most brokers will offer a wide range of investments from stocks and bonds to precious metals and foreign exchange.
- Customer Service – Call or chat online with a customer service representative and make sure they are well trained and willing to help. Even if you don’t think you’ll need customer support, there may come a time when you need timely and professional assistance.
- Account Minimums – Some brokers require a minimum deposit of several thousand dollars. Other allow you to open an account with no minimum deposit. You will also find brokers who require higher minimums in order to access premium platforms, support, and financial advice.
- Trading Tools – Having access to a wide variety of trade tools can be instrumental in spotting good trade opportunities. Some of the most popular tools are last sale tickers, quality stock scanners, and mobile trading apps.
How to Make Money in the Stock Market
When a stock increases in value, it is called capital appreciation.
As I’m writing this article, Starbucks (SBUX) is selling on the NASDAQ Stock Market for $52.07 per share. If you buy Starbucks stock at that price, and the stock rises in value to $100 per share, you can sell it for a gain of $47.93 ($100 – $52.07). That would be a very successful stock trade.
You can find current stock price quotes through your online broker. Google Finance is also great for a quick quote.
Capital appreciation is not the only way to make money in the stock market.
Many stocks will pay you a portion of company profits. These investments are called dividend stocks and they distribute payments (dividends) to stockholders.
For example, right now the Coca-Cola Company (KO) pays a dividend of $0.39 per share. This means if you own !,000 shares of Coca-Cola, you will be paid $390 in dividends over the course of a year.
A big advantage of dividend stocks is that you can receive dividends even when the share prices go down. In this way, dividend stocks are a smart hedge against potential market losses.
How to Pick Stocks for Your Portfolio
Here are some guidelines to help you choose stocks.
Although nothing is ever 100% predictable, these practices are have been proven to help pick successful trades over the long-term.
1. The trend is your friend
Many investors wisely choose stocks that are rising in value while avoiding stocks which are declining in value.
How can you spot opportunities to invest in companies on the rise? Very simply, search for the 52-week high list on Google or on your broker’s site.
Think about this: These companies reached their 52-week highs because more investors purchased shares in them.
When you are creating a list of potential stocks to invest in, the 52-week high list is a great place to start.
2. Diversify your portfolio
Stocks within the same industry tend to perform similarly as a group. As such, it is wise to invest in stocks from at least three different industry groups.
Diversification reduces some of the risks in your portfolio by spreading your money over several industries. It helps even out the fluctuations in your account value, rather than if you had all your money in one industry.
3. Read the news
When you single out a company from your new highs list, review recent news stories about the company as part of your stock selection process.
This is a great way to make sure there aren’t unfavorable developments on the horizon, such as a takeover or merger.
4. Chart it
Looking at the charts needs to be an integral part of your stock purchasing routine
When you’re considering investing in a company, look at their price chart for the past two years or so. This is a great way to get a snapshot of the stock’s volatility.
As a general rule, it is wise to avoid stocks which display volatility week after week. This usually means the company doesn’t possess any real advantage in the marketplace for its product or services.
Instead, look for equities which show a cleaner trend upwards. Typically, this means they are doing something right, which is reflected in the share price.
When to Sell a Stock
Let’s talk about an ugly truth. If you invest in the stock market for long enough, you will invest in a stock that loses money.
Be prepared for it. Look at it analytically and try to remove any emotion from the situation.
This is not easy to do because ego has a way of working its way into our trading decisions.
When you’re facing a loss, remember this: Most experts recommend cutting your losses at 7% or 8% of your original purchase price.
Sell a losing stock before you suffer a devastating price decline too steep to recover from. Set your ego aside, take a small loss and live to invest again.
Trust me, this is better than taking huge losses and trying to sue your stock broker.
Now for the flip side.
When do you take your gains and sell for a profit?
Many experts agree with the 20% to 25% rule.
Sure, it’s nice to hit a home run on a stock like Apple, Netflix or Amazon. But you can still win big by taking smaller and more consistent wins with gains of 20% to 25%.
You want to sell when a stock is going up, not when it’s coming back down. That’s because rising stocks almost always meet a market correction. These corrections can result in share losses of 20% to 40%.
Don’t be caught flat-footed. Take your win and sleep well.
The Bottom Line
Getting involved in the stock market can be a lot of fun. In fact, it can be downright addicting.
To really accelerate your learning curve, keep an investment log. You will learn something on every trade you make whether they are wins or losses.
Acknowledge and write down these lessons and have the discipline to avoid repeating them.
If this guide on how to buy stocks for beginners has been helpful, please check out our other money-related content.