Checklist for Stock Purchase Closing
Buying individual stocks can be a way to grow your money and beef up your portfolio, but you need to prepare for the purchase carefully. It is important to evaluate a number of factors, from the amount of cash you have on hand to your desired asset allocation, before adding a new stock to your portfolio.
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Available Funds
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One critical thing to consider is how much money you have in your account. When you sign on to your account you should see a figure showing how much cash you have available for trading. When deciding how many shares to buy, you need to look not only at how much those shares cost but how much the brokerage commission is as well.
Cost Basis
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You need to know the cost basis any time you purchase a new stock for your portfolio. Knowing the cost basis allows you to determine the capital gain or loss you have at any point in time, and that makes it easier to compute the tax implications of any sale. When you purchase a stock, you should print out a copy of the confirmation and keep it in a safe place with the rest of your tax documents.
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Price Target
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Setting a price target for the stock you buy can be helpful, even if you are not a short-term trader. It is not necessary to set a firm sell order for the stock, but having a mental price stop in mind can be beneficial. Having that price target in mind allows you to lock in some profits and reduce the risks associated with owning individual securities. For instance, you could set a target appreciation of 20 percent, at which time you would sell half your holdings. Alternatively, you could simply reevaluate the stock when it reaches your price target to determine whether it still represents a good value.
Asset Allocation
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Before you purchase a new stock, consider how that purchase fits into your overall portfolio. It generally is beneficial to build a diversified mix of stocks, bonds and fixed-income investments, assigning each of those asset classes a desired percentage of your portfolio. It is also helpful to review the percentages in each asset class from time to time, and make any adjustments needed to bring that asset allocation back in line with your goals. If you are underweighted in the stock market, buying an individual stock you believe has promise may make sense. But if you already have most of your assets in the stock market, adding to your position could increase the level of risk in your portfolio.
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