Buying shares of stock in any company traded on a stock exchange is easy. All you have to do is open an account with a broker and place your order. The trick, of course, is to choose stocks that will make money. In reality the easy stocks for beginners are ones that can be identified with a basic knowledge of investing and a minimum of experience. Fortunately, even the newcomer to the stock market can do this by following some fundamental steps and avoiding the more complicated methods experienced stock traders use.
When you buy stock you acquire partial ownership in the company whose stock you’ve purchased. As an owner you have certain rights such as voting privileges at stockholders’ meetings. What’s ore important for most investors you share in the company’s fortunes. If it does well, the stock is likely to increase in value and possibly pay dividends. However, while stocks are generally good investments, all stock purchases carry at least some risk. A profit is not guaranteed and your money is not insured as it is if you deposit it into a bank account.
Experienced investors and speculators in the stock market use a wide variety of techniques and transactions. Some of the more popular approaches are day trading, swing trading, short selling, buying stock on margin, and buying stock options. All are entirely legitimate strategies. However, to use them effectively and limit the risks involved requires both experience and a thorough knowledge of stock trading. A newcomer to buying stocks is wise to avoid them until he or she has some experience with the fundamentals of investing in the stock market.
For the new investor, it’s easiest to focus on stocks that are traded on major exchanges like NASDAQ and the New York Stock Exchange. All of these are established companies and you will find it simple to locate information on them. You also avoid the higher risks associated with investing in start-up companies and small firms. The easy way to locate good stocks for the beginner is to read articles analyzing companies in financial publications like Kiplinger’s and the Wall Street Journal. Make this even easier by tapping your own knowledge. For example, if you work in the health care industry, concentrate on companies that manufacture medical equipment or provide services to your industry.
The next step is to research a company. Go to the company’s website and choose their “Investor Relations” section (almost all major companies provide these resources online for investors). Download and read the annual report and financial statements. Look for a few key items. First, does the company’s stock have a history (over the previous 3-5 years) of performing as well as or better than major stock indexes like the Dow Jones and Standard & Poor’s 500? Second, are the company’s current earnings and financial condition consistent with past performance? Finally, does the company have plans for the future that provide reason to expect their good performance to continue? If the answer to all three questions is yes, you have a good candidate for investing.
Once you’ve chosen a stock to buy, you have to decide what method you want to use. The traditional way is to open a brokerage account either through your bank or with a broker. If you are confident of your research, you may want to choose a discount broker to reduce commissions. Expect to make a minimum deposit of $1000 to open the account. You may have the alternative of purchasing the stock directly from the company Almost 2000 US corporations now offer this option. Typically a direct stock purchase plan requires a minimum $250-500 investment, although this can usually be made with $50/month automatic debits from your checking account. Another advantage is that the transaction fees are very low (some companies pay them for you when you buy stock, though not when you sell it). If the company you’ve picked has a direct stock purchase plan, it will be featured on their Investor Relations pages.
If you aren’t sure you are ready to do the research and pick stocks on your own, consider starting by investing in a mutual fund. This is a professionally managed portfolio of stocks, so you don’t have to do the work of researching companies. You still need to learn about the mutual fund, especially it’s performance record over the last few years, but this less work than researching individual stocks. If you opt for a mutual fund, choose a “no-load” fund. These are funds that do not charge you a portion of your investment money up front.