How to Choose Your First Stock

Stock represents part ownership in a company. Publicly traded companies sell stock in an initial public offering (IPO) to raise cash and finance their operations. Employees and executives will often hold stock in the company as a motivation to succeed. After the IPO, the value of a stock is determined on an open market and could be influenced by such things as the earnings potential of the company, the yield of its dividend and future prospects.

Difficulty: Moderate

Instructions

Things You'll Need:

• Capital to invest
• A stock broker or online brokerage account
• Access to company specific research, usually online

1. Know yourself. Whatever it is that has motivated you to buy your first stock, understand your goals. How much do you want to make, and how fast? Most stock investments are on an intermediate to long-term basis, meaning at least six months or more. With stocks, the longer the time frame, generally, the lower the risk.

2. Do your homework. Make a list of the sectors or stocks that appear to fit your criteria. There should be some reason for each stock idea. Is it the latest “in” style trend, or is it a stable, long-term grower with a solid dividend? The case for buying a stock should match the goals you identified in the previous step.

3. Drill down. Narrow your list by getting to know a company’s balance sheet, how its business operates, its executives and risk factors. Read the quarterly report; listen in on the conference call.

4. Read a chart. There are several online resources to help beginners read stock charts. A stock that may be a great buy at $30 may not be such a smart investment at $50. Understanding price action and finding good entry points on a chart can make the difference between simply owning a stock and making money on it.

5. Simulate. Using a trading simulator before buying is a great way to get a “feel” for the market, for how stocks fluctuate and respond to news. The gains won’t be real but neither will the losses. The experience, however, can be invaluable.

Tips & Warnings

• Starting with a sector and then drilling down to find the best stock or a hidden gem within that sector can be a very effective stock picking method. A stock’s sector can account for most of its stock performance, as sectors tend to come in and out of favor on Wall Street.
• Dividends are good if they are within reason. Generally, a yield between 3 to 10 percent is acceptable. More than that and the company may not be able to sustain payment. If buying a stock for its dividend, make sure its cash flow is sufficiently adequate.
• Most daytraders lose everything. Only the most experienced can consistently make money timing the market. By investing a certain amount at regular intervals, timing becomes irrelevant and an investor can take advantage of a weak market.
• Stick to your gameplan. Take profits when you have them if you've reached your goal for the stock. A gain is not realized until the stock is sold.
• There is no risk-free investment! Buying stock can result in losses and should be conducted with due diligence and, if possible, under the supervision of a professional.
• Markets can and do react to news after hours and overnight when they cannot be easily traded. Knowing your stock is the best way to avoid unpleasant surprises.

Resources

• Buying Your First Stock
• Investing Basics