For beginners, stock-picking can be a challenging endeavor. However, there are two options available for purchasing stocks: through a stockbroker or an online brokerage firm.
Engaging in stock trading on stock exchanges offers a promising avenue for accumulating substantial wealth and achieving your desired financial objectives. Over the course of history, the stock market has consistently yielded an annual return of 10% (around 6% or 7% when considering inflation), as stated by the Securities and Exchange Commission. By consistently investing over numerous years, you can effectively lay the groundwork for a secure financial future.
However, embarking on the journey of stock investing can often prove to be more challenging than it sounds. There are various factors to take into account, such as selecting the right brokerage firm, understanding the different categories of stocks, and navigating the intricacies of executing a stock order.
If you’re wondering where to purchase stocks, they are typically traded on stock exchanges such as the New York Stock Exchange and the Nasdaq Composite. However, as an individual investor, you don’t need to personally visit the stock exchange to make a purchase. Instead, you can work with a broker who will handle the trading process on your behalf.
A significant number of individual investors maintain accounts with online brokerage firms, granting them the ability to trade stocks at their convenience within market hours.
As a finance professor at Creighton University’s Heider College of Business and a Chartered Financial Analyst, Robert Johnson suggests considering brokerage firms like TD Ameritrade, Schwab, and Fidelity.
According to him, competition has pushed trading commissions to almost zero, making any of these firms a reliable option for investors.
In addition to purchasing stocks through an online brokerage, it is also possible to buy stocks through a full-service brokerage or directly from the company itself.
A beginner’s guide to initiating the process of purchasing stocks.
Choose a stockbroker.
When you begin your journey into stock buying, the initial choice you’ll face is selecting a broker. The options are plentiful when it comes to online brokerage firms. Established names such as Charles Schwab and Fidelity continue to thrive and offer a wide range of investment opportunities.
According to R.J. Weiss, a certified financial planner and the creator of The Ways to Wealth, it is advisable to seek out brokerages that provide minimal or even no charges for trading, account maintenance, and other services. Over time, these fees have the potential to accumulate and diminish your overall returns.
Over time, trading commissions have decreased, and numerous well-known trading platforms and brokerage firms now provide the option of commission-free trading for stocks and exchange-traded funds. However, it is crucial to note that fees are not the sole factor to take into account.
According to Weiss, it is essential to discover a brokerage firm that prioritizes customer service by promptly and effectively addressing any concerns. Numerous emerging platforms lack phone support, which can result in delays when urgent issues arise, as communication is limited to email correspondence.
Begin by conducting thorough research on the specific stock you are interested in purchasing.
After selecting a brokerage firm, the next step is to delve into researching the stocks you wish to purchase. The abundance of options available for comparison is both a blessing and a curse.
To provide you with a sense of the vast quantity of stocks that are accessible, it is worth noting that a comprehensive stock market index fund, encompassing nearly every stock in the U.S. market, comprises over 4,000 distinct stocks.
When it comes to selecting stocks, there are a variety of approaches that you can consider.
Investors frequently begin their investment journey by selecting companies that pique their interest, as it allows them to familiarize themselves with the world of investing. However, there are more effective approaches to constructing a well-rounded investment portfolio.
When analyzing stocks, there are two main approaches: fundamental analysis and technical analysis. Fundamental analysis involves examining a company’s financial reports and other data. On the other hand, technical analysis relies on past trends to forecast future price movements. However, it’s important to note that past performance does not always guarantee future results. While both methods can be effective, they require a significant amount of effort.
Thankfully, there are stock screeners and other tools available to streamline the research process.
For those new to investing, Johnson and Weiss suggest steering clear of hand-picking individual stocks. Instead, they advocate for index investing, which involves purchasing shares in an index mutual fund or ETF. Index funds mirror the performance of a particular stock index or market segment. Notable options include the Vanguard Total Stock Market Index Fund (VTSMX) and the SPDR S&P 500 ETF Trust (SPY), which track the S&P 500 Index and the overall stock market, respectively.
According to Johnson, the concept of index investing can be summed up as “if you can’t outperform them, join them.” It is not financially feasible for investors to take excessive risks by concentrating their investments in individual securities.
Familiarize yourself with the various categories of stocks.
The options for stocks are abundant, with a wide variety of choices available. Additionally, there are numerous categories of stocks, some of which may be exclusive to particular companies, brokerage firms, or specific investors.
The term “common stock” refers to shares of a company that are available to the general public.
Typically, the shares purchased from a company will consist of common stock.
Investors who hold common stock are granted the privilege of exercising their voting rights within the company. Dividend payments may be associated with certain instances of common stock ownership. However, the primary source of profit is derived from the gradual appreciation of the stock price.
According to Johnson, when purchasing 100 shares of Coca-Cola Co. (KO) stock, it is highly probable that you are acquiring the common stock. The common stock represents the standard shares offered by the company and generally constitutes the majority of outstanding shares for most companies.
The type of stock favored by investors is known as preferred stock.
Some companies choose to issue preferred stock, which is an alternative type of share. Similar to common stock, it grants investors a portion of ownership in the company. However, unlike common stock, it does not include the privilege of voting rights.
A notable advantage of preferred stock ownership is the priority in receiving dividend payments, typically at a higher rate than common stockholders.
According to Johnson, despite its name, preferred stock does not offer significant advantages to the majority of investors.
While preferred stockholders are given priority when it comes to receiving dividends, there is no guarantee that they will actually receive them. Companies have the freedom to choose whether or not to pay dividends and can cease doing so at any time.
Unlike common stock prices, the trading price of preferred stock is not necessarily influenced by fluctuations in the stock market. Instead, preferred stock prices are frequently linked to changes in interest rates.
There are various categories of stocks available.
Certain corporations choose to issue various categories of stock shares. For example, a company could offer both Class A and Class B shares, each carrying distinct privileges and advantages for shareholders.
Alphabet, the parent company of Google, serves as a prime example of a company that employs multiple share classes. Google, as part of Alphabet, offers three main categories of stock.
Investors have the option to purchase Google’s Class A stock (GOOGL), which grants them the opportunity to vote, experience capital appreciation, and receive dividends. On the other hand, Google’s Class B stock offers 10 votes per share and is predominantly held by the company’s founders, ensuring their perpetual majority vote. Lastly, Google’s Class C shares (GOOG) do not carry any voting rights.
Investors have the option to purchase fractional shares, allowing them to own a portion of a stock rather than the whole share.
A fractional share is another type of stock that you have the option to purchase. By investing in a fractional share, you acquire a portion or percentage of a complete share of stock.
If purchasing Microsoft (MSFT) stock at a price exceeding $200 per share is beyond your financial means, what alternatives might you consider?
If that is the situation, you have the option to establish an account with a brokerage firm that provides fractional shares. Rather than purchasing a whole share of Microsoft stock, you have the ability to purchase a fraction of one. For instance, you can acquire half or a quarter of a share.
Select your stock order.
Once you have selected a brokerage firm and determined the specific stock you wish to purchase, you may come across unfamiliar terminology when executing the transaction.
In order to place a stock order, there are three key terms that you must familiarize yourself with.
The ask price refers to the lowest price at which a seller is willing to sell a stock.
The bid price signifies the highest amount that a purchaser is prepared to offer for a particular stock.
The bid-ask spread refers to the variation between the price at which a seller is willing to sell a security (ask price) and the price at which a buyer is willing to buy it (bid price).
A market is considered to be liquid when the difference between ask prices and bid prices is minimal. Like any other market, the stock is typically sold to the buyer who offers the highest bid price.
To proceed, it is essential to grasp the various types of stock orders available for purchase. The following table provides a comprehensive breakdown of these order types and their respective definitions. For novice investors and those adopting a “buy and hold” strategy, the most prevalent order is a market order. When investing in a specific stock for an extended period, the slight disparities in trades become less significant.
When it comes to trading, ETFs and stocks have a similar process, allowing you to use the same types of orders. However, mutual funds operate differently. While you have the flexibility to place a buy order for a mutual fund at any point, all orders are executed collectively at the close of the trading day.
According to Weiss, the act of purchasing a stock or fund is not a one-time event. It is crucial to consistently make contributions over a period of time in order to establish lasting financial prosperity.
Keep in mind that the act of investing is typically a long-term endeavor for the majority of individuals. Although purchasing your initial stock or investment is a significant accomplishment, consistently investing over an extended period of time will contribute to the accumulation of wealth, the achievement of financial objectives, and the establishment of a secure and prosperous future.
