Things You'll Need:
- Computer
- Internet connection
- Money
- Time (Lots of it!)
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Step 1
First I will explain what a stock actually is. A stock is a piece of paper saying that you have part ownership in a company. For example, if you buy 1,000 shares of McDonalds Corporation, you own a percentage of McDonalds. Having stock with a company, means you have claim to a company’s assets and earnings. Note: This does not give you free reign to make decisions for the company.
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Step 2
Now you may ask yourself: why does a company issue stock? At some point a company is going to need to raise money. If they don’t, there company obviously will not succeed. By putting the company up for sale (as shares), the public can purchase it and the company will receive money. Most companies will issue Common Stock. Common stock is basically what I talked about in the above steps; part ownership in a company.
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Step 3
People buy and sell stocks everyday on something called exchanges. An exchange can be a physical location (i.e New York Stock Exchange) or it can be a virtual location via the internet (i.e Ameritrade, eTrade, ect.). An exchange is basically a place where people buy and sell stock from each other.
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Step 4
Why is it so hard to predict stock prices? Stocks should NEVER be traded on a day-to-day basis. It is almost impossible to predict what the market will (or will not) do. This is why you should always have a long term plan (15 – 20 years) when trading stock. Stock prices change because of supply and demand. If a stock looks good to people, the price will go up because people are buying it. On the flip side, if a company reports bad earnings, the stock price (usually) will go down because more people are selling. NEVER think that just because a company has a high stock price it must be a good company! The value of a company is in its Market Capitalization and Earnings which I will example in the next step. For example, Google has a stock price of $350 (estimate) while Johnson and Johnson has a stock price of $50 (estimate). They trade at completely different prices but are both very good companies.
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Step 5
Market Capitalization is the stock price multiplied by the number of outstanding shares. Earnings are the profits a company will make. When you own shares in a company, you receive a portion of this profit (dividend).
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Step 6
If you are new to investing use an online brokerage firm like Sharebuilder.com to buy stocks. You can also use eTrade, Scotttrade, Fidelity, or TD Ameritrade to trade but these companies charge higher fees.
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Step 7
Once you choose a brokerage firm, find the stocks you like. Look at a companies P/E ratio (current and future). A price to earning ratio is a good indication of how well a company is doing in the eyes of investors. A good P/E is around 15. A high futures P/E is an indication of good things to come for a company in the eyes of investors. You should also look at a company’s ROE. Return of Equity is an indicator of how well a company handles its equity. In other words, a good ROE (15%-20%) means that the investor will get the maximum return for its shares. Anything below 15% should be considered a risky purchase. This number basically tells you how profitable a company is
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Step 8
In conclusion, when buying stock in a company, look for the following: A high Market Capitalization, positive earnings (profit), a steady increase in earnings over the past 10 years (if possible), a P/E ratio around 15, a high (but not too high) futures P/E, and a ROE of 15% - 20%. Doing all of this and having a long term approach should help cushion your future.
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Step 9
You can also view my article on reading stock tickers by clicking the article link below.
Comments
sweetspirit said
on 7/7/2009 Very informative. Thanks
irussell said
on 3/26/2009 Good information!I've been told that right now is a good time to buy because the prices are lower.
MIghtyDreamer said
on 3/26/2009 good breakdown and advice on stock buying. thanks