How To Learn How To Buy Stocks

In our view, the best stock market investments are often low-cost mutual funds, like index funds and ETFs. By purchasing these instead of individual stocks, you can buy a big chunk of the stock market in one transaction.

how to learn how to buy stocks

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Investing in stocks will allow your money to grow and outpace inflation over time. As your goal gets closer, you can slowly start to dial back your stock allocation and add in more bonds, which are generally safer investments.

While stocks are great for many beginner investors, the "trading" part of this proposition is probably not. A buy-and-hold strategy using stock mutual funds, index funds and ETFs is generally a better choice for beginners.

Full-service brokers provide well-heeled clients with a broad variety of financial services, from retirement planning and tax preparation to estate planning. They also can help you buy stocks. The trouble is full-service brokers charge steep commissions compared to online brokers.

For wealthy individuals without a lot of extra time to stay on top of their complicated financial lives, full-service brokers offer special treatment as well as a high level of trust. If all you want to do is buy stocks, a direct purchase plan or an online brokerage is a better choice.

There are thousands of different publicly traded companies offering shares of stock on the market. That makes it daunting to decide which stocks to buy. One way to think about researching the stocks you want to buy is to adopt a well-thought out strategy, like buying growth stocks or buying a portfolio of dividend stocks.

Whichever strategy you choose, finding the stocks you want to buy can still be challenging. Stock screeners help you narrow down your list of potential stocks to buy and offer an endless range of filters to screen out all the companies that do not meet your parameters. Nearly all online brokerage accounts offer stock screeners, and there are more than a few free versions available online.

With a stock screener, you can filter for small-cap stocks or large-cap stocks or view lists of companies with declining share prices and stocks that are at all-time highs. They also generally let you search for stocks by industry or market sector. Filtering by P/E ratio is a great way to find shares that are overpriced or underpriced.

An alternative to individual stocks is an index fund, which can be either a mutual fund or an exchange traded fund (ETF). These funds hold dozens or even hundreds of stocks. And each share you purchase of a fund owns all the companies included in the index.

The stock market is really a way for investors or brokers to exchange stocks for money, or vice versa. Anyone who wants to buy stock can go there and buy whatever is on offer from those who own the stock. Buyers are expecting their stocks to rise, while sellers may be expecting their stocks to fall or at least not rise much more.

Right off the bat, investors should know that there's no foolproof algorithm or formula that will ensure success. As many stocks as there are, there are thousands more investing philosophies, schemes, strategies and mindsets that investors use to approach the market.

As a newer investor, or even as an experienced market participant reexamining your own approach, it's helpful to understand the following principles. Here are seven things you should know before picking stocks:

By opting to pick individual stocks, you're betting on your ability to beat the market and exceed the return of the stock market at large. This is extremely difficult to do: 84% of professional fund managers, whose entire job is to beat the index, fail to outperform their benchmarks after a five-year period. After a 15-year period, more than 89% of managers fail at that task, according to the SPIVA U.S. Scorecard, a study by S&P Global.

Individual investors face even bigger hurdles to success and not just because they don't have the luxury of dedicating their entire working life to studying investments. Psychological mishaps like buying when stocks are on a run and selling when they're down, as well as overtrading, are largely to blame for the miserable actualized returns of everyday investors.

So, while this principle is arguably the least satisfying of the seven, it's also the most fundamentally important. By choosing to pick stocks and not buying a low-cost index fund like the Vanguard 500 Index Fund (ticker: VOO) that automatically earns you market returns, you're engaging in a bit of hubris and choosing to go against the odds.

Do you have a shorter runway, and simply desire to play it safe and maybe earn a little income while you're at it? You'll likely only want to consider blue-chip companies and dividend stocks; you may find some ideal portfolio pieces among real estate investment trusts or dividend aristocrats.

"If you do decide to handpick individual stocks, learn as much as you can about them and have a level of conviction about their story, balance sheet and where they're going," Cronin says. "This will help you stay the course when their share price drops."

If it's too good to be true, it probably is. This ancient aphorism holds true in the stock market, where many deceptive temptations can await investors. One common mistake newer investors can make is to be drawn in by stocks with attractive-seeming valuation metrics, most commonly the price-earnings ratio, or P/E ratio.

Cyclical companies like homebuilders, automakers and banks may on occasion sport P/E ratios much lower than the rest of the market, making them appear cheap. But just because you see companies trading for single-digit P/E ratios doesn't mean these stocks are oversold. In fact, the market may be signaling that the peak of the earnings cycle is in the rearview mirror, and trailing earnings are much higher than one can expect moving forward. These kinds of seemingly cheap stocks are known as "value traps."

Especially if you want a set-it-and-forget-it portfolio, you'll want to pick stocks of companies that have long-term competitive advantages distinguishing them from the broader market. Warren Buffett refers to these perks as "moats" that protect the corporate castle.

The last thing to know about how to pick stocks is that your portfolio will frequently rise and fall for reasons unrelated to the specific stocks you own. Last year provided a great example of systematic risk in action, as all three major U.S. stock market indexes entered bear markets as inflation, war and soaring interest rates shellacked equities.

While systematic risk is a part of life, investors can confront it by buying stocks with lower correlation to the market, known as low-beta stocks, or embrace it by selecting high-beta stocks. Beta measures the volatility of the wider stock market, which is always 1.

While beta isn't a perfect metric, generally speaking, stocks with betas below 1 will move in a less pronounced way when markets rise or fall, while the opposite is true for high-beta stocks. In theory, this makes low-beta stocks more preferable in bear markets and high-beta stocks better picks for bull markets.

Investing in stocks is a great way to build wealth by harnessing the power of growing companies. Getting started can feel daunting for many beginners looking to get into the stock market despite the potential long-term gains, but you can start buying stock in minutes.

While investing in individual stocks isn't for everyone, determining your strategy ahead of time can make it less vexing, says Michael Antonelli, managing director and equity sales trader at Baird, a Milwaukee-based investment bank.

In active management, specific stocks are picked to outperform the market. The catch is that the returns are uncertain and volatility is a constant risk. Choosing stocks can be a fool's errand and remains extremely challenging.

Distinguishing between a trade and an investment before buying a stock is important, McCoy says. A trade of a stock is short term, lasting anywhere from a couple of hours to a few days. In contrast, stocks held longer are considered an investment.

"Investors need to know that individual stocks can be risky, and even when they think they understand a company, something can come along to disrupt them and their investment," he says. "Even great companies struggle. Just look at GE (NYSE: GE), a name that was once considered the gold standard for American companies that now languishes below $10 a share."

1. Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called "income stocks."

Some companies also issue preferred stock, which usually guarantees a fixed dividend payment similar to the coupon on a bond. This might make preferred stocks attractive to people looking for income. Dividends on preferred stock are paid out before dividends on common stock.

Industry experts often group stocks into categories, sometimes called subclasses. Each subclass has its own characteristics and is subject to specific external pressures that affect the performance of the stocks within that subclass at any given time.

Stocks can also be subdivided into defensive and cyclical stocks, depending on the way their profits, and their stock prices, tend to respond to the relative strength or weakness of the economy as a whole.

Defensive stocks are in industries that offer products and services that people need, regardless of how well the overall economy is doing. For example, most people, even in hard times, will continue filling their medical prescriptions, using electricity and buying groceries. The continuing demand for these necessities can keep certain industries strong even during a weak economic cycle.

Growth stocks, as the name implies, are issued by companies that are expanding, sometimes quite quickly, but in other cases over a longer period of time. Typically, these are young companies in fairly new industries that are rapidly expanding. 041b061a72