Choosing stocks is a lot like buying a car. When you buy a car, you cannot choose the first one that is the right color, you have to know. You want to check under the hood, or at least kick the tires. If you don’t know about cars, bring your brother, your dad, or someone who does. The most important thing is that you take your time. If you’re unsure about the mileage or the sound of the exhaust, just let it go and hope for a better deal. It is no different when you choose stocks.
The first thing you need before buying shares in a company is a share trading account. To do this, you need a broker. If this is your first time, I recommend using a discount broker. This type of broker will process your buy and sell orders, and little else. Where do you go to find a stockbroker? Test your bank. There may be other less expensive options, but your bank is a place where you feel comfortable and know how it works. Chances are, if you have an account there, they can help you start a stock trading account easily and inexpensively. I trade stocks through online banking.
For your first purchase, you want to buy what you know. Look at 3 companies you like: companies you have bought things from or where you meet people. Take a newspaper and write these four things:
- Price– If the stock is $ 500 a piece, you may want to skip this one for now.
- Movement of the year (YM)
– This is how much the stock’s value grew last year, and a pretty good indication of what the company will be trying to outperform this year.
- Dividend Yield (DY)
– This is a percentage of the value of each share that the company pays to shareholders each year. Some stocks don’t pay dividends, but they make up for it with increased growth (if the company doesn’t pay shareholders, you can spend that money on making the company more valuable).
- Price / Earnings (PE)
– This is simply the share price divided by how much the company made in this financial year. This figure can be misleading depending on the current phase of the financial year, but basically a low Price / Earnings ratio means that the company’s stock is valued more or less for the amount of money the company is making.
Either that, or the stock is undervalued and could skyrocket at any moment. If the ratio is high, it means that the company has a lot of projected growth, but little actual profit so far. This was common during the “internet bubble”, when companies had great prospects but had not yet made any money.
Once you have them, it’s time to look at some charts. Go to the company’s website and click on “Investor Relations.” Download everything and look at charts of your stock price and dividend payments for the past year, 3 years, and 5 years. Now read the newspaper. Not on the cover, the boring parts on the back cover about the money. Most of these articles are fairly easy to read, and reading them for a few weeks will give you a pretty good idea of what’s going on in the world of high finance.
Choosing stocks is more than knowing the company. It is about knowing what is happening in the world that will affect the company. Now is the time to decide your goals and make a buying case. First, write down what you want from your investment. Do you want to accumulate capital in 10 years or do you want to double your money in a year, but with the risk of losing half? If you are the former, then you are a growth investor. Otherwise, you are a value investor. You may be somewhere in the middle, but since this is a first purchase, it would be a good exercise to choose stocks according to a strict investment philosophy.
Now your buying case: this is an argument for and against buying stocks. In it you need to write:
- What is happening in the company regarding new business, new directors, new companies, new debt, new acquisitions / sales of subsidiaries, etc.
- What is happening in the world that could affect the ability of the company to make money
- The worst thing you can imagine is happening. Think about the one thing that would cause your company’s stock to plummet more than anything else.
- All the pessimistic ideas you can think of as to why you shouldn’t buy these stocks.
- Why do you think this is a good time to buy shares in this company now?
Lastly, before you buy stocks, ask people. Ask someone who works for the company or ask an investment advisor, even if you have to pay them. If there’s just one factor that you haven’t considered, your entire stock trading experience could be very painful.
Remember, buying stocks is not gambling if you know the rules. Understand your risks and don’t take any that you can’t afford. Avoid startups for a first investment – save riskier stocks for when you’re more confident.