Stock Buying Options
Buying shares of stock is one of the best ways to grow the equity in your portfolio. It's not without risk, of course. The astute investor, even if he is a novice stock trader, will take the time to learn the various stock buying options and strategies and choose those best suited to his investment goals.
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Identification
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When you buy shares of stock, you purchase equity (part ownership) in a company. Stock trading is governed by rules set by the Securities and Exchange Commission (SEC) to ensure companies disclose information investors need and to prevent unethical practices such as insider trading (when someone privy to confidential information uses it to take advantage of investors). There are a variety of stock buying options including the traditional mutual funds and full-service brokerage firms. You can also buy shares through online and discount brokers or directly from corporations in many cases. If you are more adventurous, you can leverage stock trading by using strategies like buying on margin.
Mutual Funds
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Mutual funds that invest in stocks offer some advantages compared to selecting your own stocks. Mutual funds are professionally managed and reduce risk through diversification, and you don't have to research stocks individually. The most common are growth funds that seek to increase the value of your investment. Some are considered aggressive funds that take greater risks in exchange for potentially higher returns. Still others are income oriented and focus on low-risk stocks with high dividends. Each fund has a prospectus investors should read carefully before choosing a mutual fund. The prospectus (required by the SEC) discloses the fund's performance history, management record, terms and costs.
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Brokers
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The most well-known option for buying stocks is to open an account with a brokerage firm. The broker takes your buy (or sell) order and sends it to a stock exchange or dealer where the transaction is made. Investors may choose from full-service brokers, who are more expensive but provide financial advice and investment resources, or discount brokers, who are far cheaper (but pretty much only execute transactions). In either case, most brokerage firms let you trade online once you have an account. Opening an account is much like opening a checking account. You'll need to provide identification, personal information and your place of employment. If you choose to open an account with borrowing privileges (a margin account), your credit is checked, and any funds or stocks in the account are collateral when you leverage stock trades.
Direct Purchase
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There are two popular ways to buy shares directly from the companies that issue them. Your employer may have an Employee Stock Ownership Plan (ESOP) that allows you to invest part of each paycheck, enabling you to invest with low transaction costs. The disadvantage is you can only buy stock this way in the company you work for. Many major corporations (WalMart, Kellogg's and Exxon to name a few) have direct stock purchase plans. These have low transaction fees (some charge nothing for purchases), and you can usually start with $50 per month if you arrange automatic debits from your bank account. You can find out if a company offers direct purchasing by checking its investor relations website.
Unlisted Stocks
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Not all publicly traded corporations are listed on the New York Stock Exchange or other formal markets. Many are traded over-the-counter (OTC) with the transactions negotiated by dealers rather than on an exchange trading floor. Lists of these stocks (called pink sheets) are available from dealers and many brokers. For the novice investor, caution is in order with OTC stocks. Most are smaller companies (including most low priced "penny stocks") and so carry greater risk. The attraction, of course, is you may be able to spot the next Microsoft or Google in its early stages of development. If you do choose this option, do careful research and limit investments to a small percentage of your portfolio (most financial advisers suggest no more than 10 to 20 percent).
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