How to Invest in Stocks as a Beginner
Stock shares are pretty much what the name implies-when you buy stock in a company you acquire a share in the ownership. If you are ready to invest in stocks as a beginner you first need to educate your self about how to choose stocks to buy, as well as the nuts and bolts of making stock transactions. Buying stock is not like having a savings account in a bank where the money is insured; there is never a guarantee you will not lose money. Most people do make money-and far more than they would from the interest a bank pays-but risk is involved.
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Instructions
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Understand how shares of stock can make you money. There are two ways to make money owning stock. The first is if the price of the stock goes up (usually because the company and its profits grow). The other is through dividends. A dividend is a part of the profits the company has made that is paid to shareholders, rather than being retained to pay off debts or invest in new equipment.
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Know what your share of ownership in a company means. You have "limited liability." This means if the company should go bankrupt, you are not liable for any debts the company owes. Creditors would be paid first before you get any of your money back. But if the company's debts aren't cleared, you cannot be held liable. It's also important to know the two types of shares: common and preferred. Most shares are common stock. This stock gives you the right to vote at shareholder meetings, as well as benefit from price increases and dividends (if any). Many preferred stocks don't give the holder a vote and the price tends to be more stable. Preferred stocks, however, usually pay higher dividends and these will be more regular (the dividends are often guaranteed as long as the company makes a profit).Common stocks are better for long-term growth, while preferred stock is usually best if you want more immediate income from your investment.
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Know what to look for when deciding to invest in stocks as a beginner. Check the stock's "P/E ratio." This number tells you how much profit the company earned per share. A PE ratio of 10 means the stock costs $10 for every dollar of profit the company earns. High PE ratios can indicate the stock is overvalued or the company has very good future prospects. Low PE ratios may indicate a stock at bargain prices-or a company that is facing problems. You can find PE ratios listed with most daily stock quotations in the newspaper or online.
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Study the company's history. There are three questions you need to ask. First, has the company shown consistent growth (preferably with prices rising faster than the market averages) from year to year? Second, if the company pays dividends, are they regular or hit-or-miss? A company (especially a young firm) that does not pay dividends may be a good investment if it is choosing to use the profits to expand the business. Third, is the management of the company stable? Frequent changes in management, especially in recent years, indicate a company may have internal problems that aren't visible to outsiders.
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Look at the company's recent performance. Are its profits and revenues growing or declining? Is there a recent sharp rise or fall in prices? If a company is otherwise solid, a stock price decline is likely indicates the stock is available at a bargain price (and vice versa for a sudden price rise).
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Ask yourself why you want to buy stock in a particular company. If the answer is that you like the company's products or a friend works for it or you find its image appealing, watch out! You should invest based on rational calculation, not emotional responses. Ask yourself if you are willing to hold this stock for several years-do you see it as a good long-term investment?
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Open a brokerage account when you're ready to invest in stocks as a beginner. You can do this through your bank if you like. Another option is a full-service brokerage house. These charge higher fees but provide a range of research information and other services. If you've learned to properly research a company before you invest, you'll probably choose a discount brokerage. The discount broker charges low fees and basically does little except carry out your transactions.
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Consider alternative ways to invest in stocks as a beginner. The most common is through a mutual fund. These funds are very large stock portfolios with the stocks chosen by professional fund managers. Good mutual funds charge a small percentage of the profits from investments. You get the benefit of expertise, without having to research individual stocks. You still need to study the mutual funds to make sure you are choosing one that has a good track record. Make sure you pick a "no-load" fund if you decide to go this route. A no-load fund is one that does not take a portion of your original investment right off the top.
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Tips & Warnings
As a beginner you should avoid sophisticated or high-risk financial transactions such as options, commodities (futures) trading and day trading. There is nothing wrong with this type of financial trading, but they require knowledge and experience a beginner does not have.
