One of the best ways for individuals to build their financial assets is to invest in shares of stock. The ownership of shares in a company makes you part owner and you will share in the company’s profits through dividends and growth in the value of the stock itself if the company does well. The steps below describe how to invest in shares and how to decide what companies are good risks. Use the Resources at the end of this article to get more information on how to invest in shares of stock.
Things You'll Need
- Brokerage account
Decide on the type of investment account you want. The most widely used accounts are those offered by banks, full service brokerage firms, and discount brokers. If you go through your bank, you have the advantage of being able to deal with people you know. Banks generally charge modest fees as well. A full service brokerage will provide you with research information and other services, but they do charge higher fees. For experienced investors, the discount broker is the most popular choice because they charge low fees to carry out stock transactions.
Develop an investment strategy that fits your financial goals. You may be interested primarily in generating income when you invest in shares. If that’s the case, you will want to focus on stocks that are stable and low risk, which pay high dividends. On the other hand, if you want your portfolio of stocks to grow in value, seeking out strong growth-oriented companies is a better strategy. For most investors, it’s better to focus on one or two industries. In this way, you can follow developments and market trends within those industries and have better understanding of how specific factors will affect stocks you own or are considering buying.
Examine a stock’s performance. Stocks don’t always go up in price even when the company is doing well, because market conditions can affect the stock’s price. The stocks to look for are those that consistently do better than the market averages. Look at a stock’s PE ratio. This figure tells you how much a stock costs compared to the earnings per share. A high PE ratio can indicate a stock is overvalued (or sometimes that the company’s prospects are unusually good). A low PE ratio can be a clue that a stock is undervalued. If you are interested in stocks that provide income, check the dividend rate. Finding this information is easy, since its normally listed along with daily price quotes in the newspaper and on online stock reporting sites.
Learn about the company. Go to the Investor Information section of the company’s website and read up on it. You can also order a copy of the company’s annual report. Look for the company’s recent history (the past 3 to 5 years), its current status, and its future plans and prospects. Finally, compare the company to others in its industry to see how it is doing in relation to them.
Stay up-to-date on the company and how it’s stock performs once you invest in shares of the company. Changes in market conditions, new technology, and changes in management can all affect a company’s stock performance. While you don’t need to check the price every single day, you should stay current and watch developments that affect the company. There are plenty of business publications such as the Wall Street Journal that provide valuable information. There are also industry specific magazines and company newsletters you can use to keep up with developments.
Diversify your stock purchases by finding and investing in several companies. No matter how attractive a company may be, there is always some risk involved when you invest in shares. By buying several different stocks, you minimize your risks.
Tips & Warnings
- If you lack the experience or time to research stocks individually, you may want to invest in shares of a mutual fund. This is a portfolio of stocks managed by professionals. However, there are good funds and others that don’t perform well. You still need to learn as much as you can about a mutual fund before you invest in shares in it.