Buying stocks, once limited to Wall Street, has become far more accessible the past 2 decades thanks to online brokerages. Prior to online trading, people relied on the services of a stock broker, but, now people can buy and sell orders themselves instantly by buying stocks online.
A savvy investor should still become familiar with the basics of buying stocks, the theory behind the market, and the daily reports that drive it.
Knowing which stocks to watch requires research!
The stock market operates on the basic principle of supply and demand. When you buy stock, your hope is that others become more eager to make an investment over time. When the stock’s popularity increases, traders will compete to own it, resulting in increased demand and bid up the sale price since the supply remains the same. This drives up the price.
A rising share price should be the result of improvements in the firm’s value and potential, known as its fundamentals. In reality, however, stock prices change for any number of reasons, many of which are unpredictable, hence why the stock market is known to be volatile.
There are two main schools of thought regarding how to determine which stocks to watch:
Firstly, using fundamental analysis to determine which stocks to buy relies on a company’s financial reports and public statements to analyze the viability of the business. Important tools for a fundamental analysis include a company’s balance sheets, income statements, yearly and quarterly earnings, and official news releases. Those reports are public record as are tutorials on how to read them offered by the SEC. Market and industry trends, media publications and historical analysis are also part of a company’s fundamentals.
Secondly, using technical analysis to choose stocks to watch is based on the idea claiming swings in stock prices follow patterns one can learn to detect and, thereby, earn profit. Technical analysis is not as widely accepted or practiced as fundamental analysis, but, many traders use a combination of the two techniques to choose which stocks to buy. Choosing a company based on its sound fundamentals and then occasionally trading that stock based on a technical indicator is a safer strategy that relying on technical indicators alone.
Before selling or buying stocks, thoroughly research the company, its leadership, and its competition. Sites such as Yahoo! Finance offer excellent compilations of news stories, financial statements and stock price histories (called charts) that provide insight into the company. Stock sites also display professional analysts’ ratings of a given stock, indicating whether that analyst advises a trader to buy, hold or sell a stock. Examining the records of those analysts may help you assign value to their opinions.
The first step of buying stocks is choosing an online trading service.
Rob Beauregard, director of public relations for Fidelity Investments, explained to Business News Daily:
“The best piece of advice for an online trader is to choose your brokerage partner with open eyes. Know their pricing, service, investment choices, education and research resources, and security practices. No one should just rely on their gut instincts or the tip from their friend or neighbor anymore. The resources easily accessible to them to generate and validate investing decisions are too valuable not to utilize.”
When you’re looking for an online broker, consider your needs and their fees; check out Business News Daily’s sister site, Top Ten Reviews, for a detailed guide. Popular services to buy stocks online include: E-Trade, ShareBuilder, Fidelity, Scottrade, and TD Ameritrade.
If you prefer to be a do-it-yourself trader, you can make use of discount online broker services. These services allow you to buy and sell not only stocks, but, also options, mutual funds, exchange-traded funds, fixed income funds, bonds, certificates of deposit, retirement accounts and more. You ultimately get to make the final decision on each investment and whether or not to buy or sell, and you don’t need a large sum of money to start.
Practice buying stocks: Research is absolutely vital, but, it is no substitute for the experience of actually buying stocks.
A zero-risk way to practice buying stocks is with an online stock simulator such as those set up by Investopedia, MarketWatch, and Wall Street Survivor. Another popular option is buying penny stocks since they require little investment capital, but, can yield respectable ROIs.
When starting out buying stocks, only invest money you can truly afford to lose. Be brutally honest about what you can afford to lose before buying stocks. Only once you have realized gains from those investments can you reinvest those gains (which have now become your principal).
As you choose stocks to buy, diversify your investments. Stocks offer high risks and high rewards; they are not stable sources of income. Consider diversified investments like an electronically traded index fund which holds many stocks. Because they are diversified, the losses of an ETF may cancel out by gains in another.
Buying stocks means treating market research like a job. This is about making money, right? Like any job, your skills need frequent practice to keep up with the times and stay sharp. This involves keeping up with the latest news and financial reports on what you’ve determined are stocks to watch before buying stocks. If this time investment is not feasible, consider investing in an index fund or using a qualified professional.
Before buying stocks, have a strategy. Consider what circumstances would lead you to sell it and plan accordingly. For example, you may determine that you cannot risk more than 20 percent of your investment. Many brokerages have the ability to schedule, buy, and sell orders based on predefined criteria.
“Have a plan and stick with it,” Beauregard said. “Know why you are buying a particular security, how much to invest, what your expected return is, and have an exit strategy.”
Avoid buying stocks too high. Instead, wait for opportunities like hot penny stocks. Buy low, sell high is the old adage for a reason.
Don’t invest in buying stocks if you can’t stand the risk. Stock trading is a long-term investment and requires patience and perseverance. Again, only invest money you do not need.