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How to Buy Stocks: 10 Steps with Pictures wikiHow

HowtoBuyStocks
ThreeParts:

LearningAboutTheStockMarket

ResearchingAStockPurchase

Expert
Reviewed
MakingYourInvestment

QuestionsandAnswers

Whenyoubuystock,youarepurchasingownershipinthecompanythat
issuesthesecurity.Asanowner,youhavecertainrights.Forexample,astock
investorhastherighttoreceiveadividendifthecompanygeneratessufficient
earnings.Investorsalsohavethepotentialtoselltheirsharesofstockfora
gain.Youcanbuyindividualsharesofstock,orpurchaseastockmutualfund.

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Part1of3:LearningAboutTheStockMarket

Considerhowthestockmarketworks.Thestockmarketworkslikeanyother
marketplace.Inthiscase,theproductsbeingboughtandsoldarepiecesof

ownershipincompanies.Wecallthesesharesofstock.Stocksaretradedon
exchanges.Youcanthinkofanexchangeasthemarketplace.IntheU.S.,themajor
exchangesincludetheNewYorkStockExchangeandtheNationalAssociationof
SecuritiesDealersAutomatedQuotationsystem(theNASDAQ).[1]
Stockpricesmoveupanddowndependingonsupplyanddemand.Whenthere
isalargedemandforastock,itspricewillrise.Sincetherearemoreinterested
buyersthansellers,thestockpricewillincrease.Whentherearemoresellers
thanbuyers,thepricewillfall.
Astock'spriceisareflectionoftheinvestmentcommunitysopinionofthe
stock.Thepriceisnotnecessarilytheactualvalueofthecompany.Thismeans
thatshorttermpricesareoftenaffectedbypeople'semotions,ratherthanby
facts.Pricescanmovebasedoninformation,misinformation,andrumor.
Yourgoalasastockinvestoristopurchasesharesofacompanythatwill
increaseinvalueovertime.Iftheissuingcompanygrowstheirsalesand
increasesprofits,investorsmaybuymoreofthestock.Ifthestockpricegoes
up,youcansellyoursharesforagain.
Forexample,imaginethatyoubuy100sharesofstockpricedat$15each.
That'sa$1,500investment.Aftertwoyears,thestockpriceincreasesto$20.
Now,yourinvestmentisworth$2,000.Ifyousellyourshares,youllrecognizea
$500gainbeforeanyfeesorcommissions($2,000$1,500).
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Goovertheterminologyrelatedtostocktrading.Thesetermshelpyoudecide
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exactlywhattypeofbuyorsellorderyouwanttoplacewithyourbroker.Theterms
allowyouplacecertainconditionsonyourordertobuyorsellstock.[2]
Theaskprice,alsoknownastheoffer,isthelowestavailablepricewhentrying
tobuysharesofastock.AssumeyouwanttobuyIBMcommonstock.Ifthe
currentaskpriceis$50pershare,youwouldpaythe$50priceforthestock.
Thebidprice(orsimplybid)isthehighestavailablepriceyoucanfindwhen
tryingtosellsharesofastock.IfyouownIBMcommonstockandwanttosellit
now,youwouldreceivethebidpricepershare.Ifthebidpriceis$49.75,you
wouldreceivethatpricepershare.
Amarketorderisarequesttobuyorsellasecurityimmediatelyatthebest
priceavailable.Ifyouplaceamarketorder,youwillpaytheaskpriceasa
buyer.Ifyouareselling,themarketpriceyoureceivewillbethecurrentbid
price.Keepinmindthatyourordercouldbeexecutedatapricehigherorlower
thanwhatyou'rehopingfor.Theimmediateexecutionofamarketorderis
guaranteedbutthepriceisnot.
Inadditiontoamarketorder,youcanplaceordersthatputconditionsonyour
buyorsellprice.Alimitorder,forexample,isarequesttobuyorsellasecurity
ataspecificpriceorbetter.Ontheotherhand,astoporderisanorderthat
becomesamarketorderonceacertainpriceisreached.Consultwithabroker
whoislicensedtotradesecurities.Askthebrokeriftheseothertypesoforders
arerightforyou.

Lookintobuyingamutualfund.Amutualfundispoolthemoneyprovidedby
manyinvestors.Thepoolcanbeusedtobuyavarietyofinvestments.Youcan

selectamutualfundthatinvestsinthestocksofmanydifferentcompanies.Whenyou
investthroughamutualfund,yougetastakeineverystockthefundinvestsin.Thiscan
bealowerriskalternativetobuyingstocksindividually.[3]
Investinginmutualfundscanloweryourinvestmentriskbecauseof
diversification.Ifyouinvestinonestock,yourriskisconcentratedinone
company.Amutualfund,ontheotherhand,mayholddozens(evenhundreds)
ofstocks.Ifthevalueofonestockdeclines,itwillhavelittleeffectontheoverall
valueofyourinvestment.
Ifyourejuststartingoutasaninvestor,thiscanbeagoodwaytoinvestin
stocks.Chooseamutualfundifyoufeeluncertainaboutinvestinginstocks
individually,orifyoudon'thavesufficienttimetoresearchandmanagea
portfolio.
Beawareofmutualfundfees.Keepinmindthatyouwillpayfeesfor
professionalmoneymanagementinamutualfund.Forexample,youmaypaya
saleschargewhenyoubuyorsellyourfund.Fundinvestorswillalsopayan
annualfeeforthemoneymanagementandoperationofthefund.Theseannual
feesarebasedonapercentageoftheassetsundermanagement.
Say,forexample,thatyouhave$10,000investedinastockmutualfund.Ifthe
annualfeeis1/2of1%oftheassets,youannualfeewillbe$50.
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Part2of3:ResearchingAStockPurchase
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Learnaboutinvestmentresearch.Ifyoudecidetopurchaseindividualstocks
insteadofamutualfund,itisimportanttodosomeresearch.Thereisahuge

amountofavailabledataontheInternet.Findingusefuldatacanbedifficult.Thereare
someusefultoolsyoucanusetoperformanalysisandselectastock.[4]
Informationaboutstocksistypicallyfoundonacompany'swebsiteorintheir
annualreport.Theseresourcescanprovidevaluableinformationabouta
company'sbusinessmodelandfinancialresults.Inaddition,companies
frequentlyprepareinvestorpresentations.Thesepresentationsareoften
providedinaneasytounderstandformat.Reviewthesedocumentsbefore
makinganinvestmentdecision.
WebsiteslikeMorningstar.comarealsouseful.Newinvestorsmayfind
quarterlyorannualreportsoverwhelming.Byresearchingastockon
Morningstar,youcanaccessessentialinformationonacompany,suchasthe
balancesheet,incomestatement,andstatementofcashflows.Morningstar
alsoprovidesimportantfinancialratios,whichhelpinanalyzingthecompany.
Thiswebsiteiseasytonavigateandreview.
PerformaGooglesearchfornewsaboutthecompany.Readtherecentnews
articlesthatexplainhowthecompanyisperforming.Anewssourceshouldbe
anindependentthirdparty,sotheinformationshouldnotbebiased.

Searchforcompaniesofinterest.Thefirststepistofindacompanytoresearch.
Todothis,readinvestingpublicationsandwebsites,liketheWallStreetJournalor

Investor'sBusinessDaily.Similarly,websiteslikeStockchase.comcanprovideideasfor
stocksthatanalystsrankhighly.[5]
Startbyinvestinginbluechipstocks.Bluechipstocksarelarge,well
establishedcompanieswithatrackrecordofgeneratingprofits.Thesefirmsare
typicallyrecognizablecorporatenames.Theymakeproductsandservicesthat
consumersknowandpurchase.Thesestocksaremorelikelytogrowsteadilyin
priceoverthelongterm.
Whilethesecompaniesdopresentsomerisktotheinvestor,theyareoftenless
volatilethanothercompanies.Bluechipstendtohavealargemarketsharein
themarketstheyoperate.Thesefirmsarewellfunded,andmayenjoysome
competitiveadvantage.
BluechipstocksincludeWalMart,Google,Apple,andMcDonald's,among
manyothers.Thinkaboutcompaniesthatyouturntoforproductsandservices.

Chooseabusinessthatperformswell.Onceyoufindagoodcandidate,you
shouldreviewsomekeyfinancialindicatorsforthecompany.Comparethose

indicatorswiththefirmscompetitorstoseehowtheycompare.Afewspecificindicators
arewidelyusedtoassesstheinvestmentvalueofacompany.[6]
Lookatthecompany'sprofitmargin.Profitmarginisdefinedas(netincome)/
(sales).Forthisdiscussion,netincomeandprofitmeanthesamething.This
indicatorexplainshowmuchprofitafirmgeneratesforeverydollarinsales.A
businessalwayswantsahigherprofitmargin.Ifafirmearned10centsonevery
dollarsold,forexample,theprofitmarginwouldbe(.10)/($1),or10%.
Analyzethecompany'sreturnonequity.Equityreferstothetotaldollars
investedbyallcompanystockholders.Returnonequityshowshowwella
companyisusingitsshareholders'moneytogenerateaprofit.Theratiois
statedas(profit)/(shareholderequity).Ifafirmearned$100,000profiton
$2,000,000inequity,thereturnonequitywouldbe($100,000)/($2,000,000),or
5%.
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Lookatacompany'spastandexpectedgrowth.Isthecompanysteadily
growingearningspershare?Thisisasignofastrongbusinessthatlikelyhasa
competitiveadvantageofsomesort.
Comparethefirmshistoricrateofearningsgrowthtoitspeers.Also,lookatthe
projectedearningsgrowthrateforthenextfiveyears.Ifitishigherthanits
peers,thatsanindicationthatthestockpricemayincrease.
Lookatthecompany'sdebt.Awellmanagedcompanyshouldnottakeonmore
debtthanitcanaffordtorepay.Onepopularwaytoanalyzedebtisusingthe
debttoequityratio.
Thedebttoequityratiotakesthecompany'sdebtanddividesitbyshareholder
equity.Thelowerthepercentageis,thebetter.Ifafirmhas$2,000,000indebt
and$4,000,000inequity,thedebttoequityratiowouldbe
($2,000,000)/($4,000,000),or50%.Comparetheratiotothefirmscompetitors.

Familiarizeyourselfwiththeconceptofvalue.Youcanthinkofastockasa
machinethatisdesignedtogenerateprofits.Ifthemachineperformswellandis

abletogeneratemoreprofit,investorsviewthemachineasmorevaluable.Themost
importantfinancialratiosforastocksvaluerelatetoearnings.[7]
Thecommonwaytovalueastockistousethepricetoearnings(P/E)ratio.
TheP/Eratiotakesacompany'scurrentsharepriceanddividesitbytheannual
earnings(profits)pershareofstock.Thisisanimportanttooltoevaluatethe
valueofaninvestment.
Earningspersharerepresentsthetotalearningsindollarsdividedbythe
numberofsharesheldbytheinvestingpublic.Sharesheldbyinvestorsare
referredtoasoutstandingshares.If,forexample,acompanyearns$1,000,000
peryearandhas10,000,000sharesoutstanding,theearningspershareis
($1,000,000)/(10,000,000shares),or10centspershare.
Assumethatacompanysstockistradingat$50pershare.Iftheearningsper
sharetotal$5,thestocksP/Eratiois($50/$5),or10.Ifaninvestorboughtthis
particularstock,theywouldbepaying10timesearnings.
IfCompanyAistradingattentimesearnings(oraP/Eof10),andCompanyB
istradingataP/Eof8,CompanyAismoreexpensive.Notethat"more
expensive"hasnothingtodowiththeshareprice.Instead,themultipleisa
reflectionofhowexpensivethesharepriceisrelativetoearnings.
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Part3of3:MakingYourInvestment

Investigatethepossibilityofbuyingstockdirectlyfromtheissuer.Some
companiesofferdirectstockpurchaseplans(DSPPs)thatallowyoutopurchase

stockwithoutusingabroker.Ifyouareplanningtobuyasmallamountofacertain
stock,thismaybeyourbestoption.Thisapproachsavesyouthetimeandcostofgoing
throughabroker.[8]
Searchonlineorcallthecompanywhosestockyouwishtobuy.Askthemif
theyofferastockpurchaseplan.Iftheydo,thefirmwillforwardyouacopyof
theirplan'sprospectus,applicationforms,andotherrelevantinformation.A
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prospectusisaregulatorydocumentthatdisclosesalloftheimportant
informationaboutastockpurchase.
Manyplansallowyoutoinvestaslittleas$50permonth.Verifyanyfeesyou
needtopay.Afewcompaniesoffernofeeinvestmentplans.
DSPPsalsoallowyoutoreinvestallyourdividendsautomaticallyifyoudesire.
Dividendsarepaidtoyoubasedontheprofitsofthecompany.Thecompanys
boardofdirectorsmustdeclareadividendinorderforapaymenttotakeplace.

Chooseabroker.Ifyoucan'tbuythestockyouwantdirectlyfromtheissuing
company,you'llneedtofindabroker.Brokeragehousesvaryintermsofthe

servicestheyprovide.Thismeansyou'llneedtocompareyouroptionsandchoosethe
brokeragethatsuitsyoubest.Generallyspeaking,therearetwotypesofbrokers:full
serviceanddiscount.[9]
Fullservicebrokersaremoreexpensive.Thesefirmstargettheirservices
towardinvestorsinterestedinreceivingrecommendationsandguidance.The
higherfeemaybeworthwhile,however,becausefullservicebrokerscan
providevaluableassistance.Ifyourenotconfidentinyourabilitytopickstocks,
orifyoudonthavetime,considerworkingwithafullservicebroker.
Ifyouplantomakeyourowninvestmentdecisions,chooseadiscountbroker.
Thereisnopointinpayingahigherfeeforservicesyouaren'tgoingtouse.
Still,youmustexamineeachbroker'splatformcloselytomakesuretheir
offeringsalignwithyourinvestmentobjectives.
SearchtheInternetforonlinediscountbrokers.Analyzethefees,particularly
anyadditionalchargesthatmaynotbementionedwhenyoufirstcontacta
prospectivebroker.Askforawrittendisclosureofallfeescharged.

Openabrokerageaccountanddepositfunds.Contactabrokeraboutopening
anaccount.Yourbrokerwillhaveyoufilloutanewaccountform.Thisform

documentsyourpersonalinformation,alongwithyourinvestmentexperienceandyour
risktolerance.[10]
YourbrokermustreportyourstocktradestotheIRS.Specifically,sales
proceedsfromastocksale,alongwithdividendincome,arereportedtothe
IRS.Youwillneedtofillouttherequiredformsandsendthembacktothe
broker.
Determinehowtodepositfundsintoyourbrokerageaccount.Sendyourbroker
aninitialdepositofmoneythatwillbeusedtomakeyourfirststockpurchase.
Enteranorder.Notifyyourbrokerofthecompany'sstockyouwanttobuyand
thenumberofshares.Whenyourtradeiscompleted,youwillreceivea
confirmation.Theconfirmationisyourrecordofthepurchase.Keepallofyour
confirmationsonfile.
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QuestionsandAnswers
Whenisthebesttimetobuy,hold,orsellastock?
Thereareathousandfactorshere.Asanovice,lookforinvestmentadvice
sourcesyoutrustwhileyouexpandyourknowledge.Adetailedlookatthe
yearbyyearperformanceandreportsofthecompanyisagoodplaceto
startlearning.

Whatistheactualprocessforpurchasingshares?
Almostallstocksarepurchasedthroughastockbroker.Thiscanrange
fromanonlinebrokerthatfollowsyourinstructions,toapersonalfinancial
plannerwhomeetsinpersontoplanyourinvestment.Thefirstoptionis
cheapthesecondoptionismoreeffective.

HowdoIbuysharesonline?Arethereassociatedrisks?
Searchforan"onlinebroker."Thisservicewillhandlethetransaction,but
offerlittletonoadvice.Thiscanberiskyifyoudon'thaveanystock
experience,butaslongasyoureadthetermscarefullyyoucanavoid
problemswiththebrokeritself.

Peopletalkaboutbuyingstocks,equity,ormutualfunds.What's
thedifference?
Anequityisageneraltermforownershipinacompany,so"sharesof
stock"and"equityshares"arethesamething.Amutualfundisacollection
ofsharesyoucaninvestinwithonepurchase,whichisalowerrisktactic
thanbettingyourmoneyononecompany.

HowdoIinvestinanexchangetradedfund?
Justlikeshares,mostETFsarepurchasedthroughastockbroker.
Althoughdiversified,theyareriskierthanmutualfunds,andthe
managementfeescanmakethemunprofitableforasmallinvestor.

HowdoIfindtheunitcostofacompany'sproduct?
Theunitcost,oramountthecompanyspendstoselloneunitofproduct,
maybelistedinthecompany'squarterlyreport.Acompanythatsells
productswithalowfixedcostcanreducetheunitcostasitgrowsthrough
economiesofscale.

HowdoIlookupashareprice?
Aquickonlinesearchfor"stockprices"willleadyoutomanyfreestock
lookupdatabases.

Don'tseeyourquestion?Askithere:
Whatdoyouneedtoknow?We'lldoourbesttofindtheanswer.
Submit

Giveus3minutesofknowledge!
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Gemology?

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prompt?

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SourcesandCitations
1. http://www.howthemarketworks.com/
2. http://www.aaii.com/journal/article/howyourbuyandsellordersget
filled.touch
3. http://investor.gov/investingbasics/investmentproducts/mutualfunds
4. http://www.investopedia.com/ask/answers/05/062305.asp
5. http://www.quintcareers.com/researching_companies_guide.html
6. http://faculty.philau.edu/lermackh/financial_analysis.htm
7. http://www.dummies.com/howto/content/costaccountingfor
dummiescheatsheet.html
8. http://www.forbes.com/sites/moneybuilder/2012/06/20/howtoinvest
usingdirectstockpurchaseplans/
9. http://guides.wsj.com/personalfinance/investing/howtobuya
mutualfund/
10. http://www.finra.org/investors/whatexpectwhenyouopen
brokerageaccount

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