Put simply, stocks or shares are securities that represent an ownership interest in a publicly traded company. When you buy stocks of a public company, you become part owner and are entitled to a proportional share of the profits or losses generated by the company.
What Do I Need to Consider When Buying Stocks?
Taxable Vs. Tax-advantaged Accounts
It may also be beneficial to consider what type of account you open, such as a taxable or tax-advantaged brokerage account. A taxable brokerage account is more suitable for short-term trading, while tax-advantaged investment accounts—such as 401(k)s and IRAs—are better if you intend to hold investments for longer.
However, the most crucial factor in choosing a stockbroker is regulatory compliance. All stockbrokers in the United States must be registered with the Financial Industry Regulatory Authority (FINRA) and abide by strict rules and regulations.
It's advisable only to select brokers regulated by the SEC or FINRA, as this ensures that your investments are safe and secure.
Types of Stocks
There are three main types of stocks to consider when researching: growth stocks, value stocks, and dividend stock.
Growth Stocks: Growth stocks are shares of companies that are expected to grow at a faster rate than the market average. These stocks often offer higher growth potential but also involve more risk. They're unique because they're stocks of small companies with a lot of 'room' to grow, hence the name growth stocks or shares.
Value Stocks: Value stocks are those which have been undervalued by the market and may offer good return potential for investors who can identify promising opportunities. The interesting part of trading them is that the perception of a stock or share's value is entirely subjective - making it challenging to identify undervalued stocks accurately. But, when correctly identified, these stocks tend to be less risky and have a higher chance of delivering a return on investment.
Dividend Stocks: Dividend stocks are shares that pay out regular dividends to shareholders, usually on a quarterly or semi-annual basis. These investments are less volatile and can provide a steady income stream because of their regular dividends.
When researching stocks, it is important to consider things like the company's financials, management structure, competitive advantages, and risk factors.
It's also important to consider the stock's performance over time, its volatility, and how it will fit into your overall investment portfolio.
Types of Trades
The thought of placing a trade and getting started with trading stocks can be intimidating, so it's essential to understand the types of trade orders found on online platforms for trading stock:
Market Orders: Market orders are used to buy or sell stock at the best available price on the stock exchange. Market order trades are executed instantaneously and may be influenced by current market conditions like spread and slippages.
If you're buying a stock, a market order will execute at whatever price the seller is asking. If you're selling, a market order will execute at whatever the buyer is bidding. The biggest drawback of the market order is that you can't specify the price of the trade.
Limit Orders: Limit order allow traders to specify the maximum amount they're willing to pay or accept for a stock, ensuring that their trade will be filled only at the price they set. These limit order could be placed as 'buy limit' or sell limit order.
Buy limit orders specify a price point below the current market price, and your 'buy' order will be executed once the stock trades to the specified price. Sell limit orders specify a price point above the current market price, and your 'sell' order will be executed once the stock trades to the specified price.
Risk management is an essential step in investing. It involves assessing the risk you are willing to take and then creating a plan to minimize it.
This strategy should consider things like diversification, stop-loss orders, position sizing, and hedging.
Diversification helps reduce the overall level of risk by spreading investments across different stocks. If one stock performs poorly, other stocks in the portfolio may still perform well.
Stop-loss orders limit losses by automatically closing a trade when a stock trades to a specified price point. Stop loss orders are a great way to limit risk and protect your capital if a stock moves unexpectedly.
Position sizing determines the amount of capital to allocate for each traded stock. It's important to size positions based on the amount of risk you're willing to take and the percentage of your portfolio allocated to each share you're willing to trade.
Hedging is another risk management strategy involving using derivatives or similar assets to offset losses in one position with gains in another. This reduces overall risk and helps minimize any potential losses.
Having a solid risk management plan in place when trading stocks is essential for managing your capital appropriately and keeping your emotions in check.
How to Buy Stocks – Step-by-Step
1. Select an Online Stockbroker
2. Research the Market and Select Stocks
3. Develop a Risk Management Strategy
4. Place a Trade
5. Monitor your Trades
How Does Dollar-Cost Averaging Work?
Let's say you want to buy a specific stock, and you have $1000 budgeted for the purchase. Instead of buying stocks all at once, you invest $100 each month over ten months.
This means that if the stock price increases during this period, your average cost per share will be lower than if you had purchased it all in one go.
This is because when the price goes up, you purchase fewer shares with the monthly amount, and when the stock price goes down, you purchase more shares.
This helps manage risk by letting you wait for lower prices without missing out on potential gains.
Is Trading Stocks a Good Idea?
At the end of the day, it's up to you to decide whether trading stocks is the right choice for you.
It can be a great way to your well diversified portfolio if you're comfortable with the risks associated with trading stocks and have the knowledge, experience, and available capital.
Note: Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell stocks or securities.