Buying and selling stocks can be a challenging and somewhat intimidating experience for beginners. What stocks to buy and when to buy them, and when to sell, are two concerns every stock trader grapplea with, regardless of the level of expertise. For the beginner, it’s extremely important to seek the advice and guidance from experts. However, people should do some homework and learn the fundamentals of buying and selling stocks to make educated decisions on their own.
Determine how much money you're looking to invest and begin by opening a trading account with an on-line broker or a traditional investment broker with branches in all the major cities (see resources). Be aware that many investment brokers require minimum amounts to open an account.
Find a good financial adviser (see resources). Most will offer free consultation to discuss your financial goals. Check the adviser's background to find out if he or she has ever been sued or has client complaints for unsuitable investment recommendations. Obviously, if they don't have a clean record, you don't want to entrust your money to them.
Determine in which market you would like to trade. The New York Stock Exchange and Nasdaq are the two largest markets where all major companies are listed. There is also the OTC (over-the-counter) market where all the unlisted "penny stocks" are traded. These are stocks that usually sell for under a dollar a share. As a beginner, beware of trading in the OTC market as it is extremely volatile and open to manipulation by "pump and dump" schemes. These are schemes in which a company's stock is "pumped," or inflated artificially through false or misleading statements, in order to "dump" or sell the overvalued stock at a higher price.
Start with the basics. Buying and selling common stocks are the most basic and popular forms of investment options. Owning common stock in a company offers the opportunity to outpace inflation and increase the value of your investment based on the company's performance. However, like other investment options, there are risks and rewards. The risk is you may lose money if the company under-performs. You might also lose money even if a company does well because of market fluctuations.
Look at a company's fundamentals, such as price-to-earnings ratio, which is the price per share divided by its earnings per share. It indicates when a company is overvalued or undervalued. Check a company's debt ratio, which indicates the ratio of debt relative to its assets. Also, consider the cash flow of a company, which signifies how solvent it is.
"Buy low and sell high," is a stock market cliche that is easier said than done. Instead, focus on buying at a certain price and selling at a higher price. Set price goals that are realistic and stick with them. When you have reached the profit price you have set, sell and don't be greedy. Conversely, be ready to absorb a loss when a stock has no expectation of recovering in the near future after posting a significant earnings loss.
Remember, there are risks to buying and selling stocks. Although there is no way to normally predict how a particular stock will perform, analyzing a company's fiscal fundamentals will narrow the playing field and make buying and selling less risky.
Tips & Warnings
- Don't gamble and never invest money you can't afford to lose. Don't let greed overcome common sense.
- Expect losses. No investor, no matter how experienced, can make profitable picks all the time.
- Never go it alone. It is wise to seek the advice of a financial adviser.