Are you on the fence about being a stock market investor? You have heard a lot of buzz about investing, but how can one be sure that this type of money-making scheme is reasonable and beneficial? As a beginner in trading, what are the steps that one must accomplish in order to buy their first shares? Aside from stocks, are there any other types of investments that budding traders can also look into? Is there a way to protect yourself from potential failures? Rookie investors have a lot to ask, but gladly, we have stock investing experts to shed light on all of them. We have listed down the answers to these questions and the corresponding steps to follow in buying stocks for the first time. Get ready to harness all this information and apply it to your upcoming purchase.
7-Step Guide for Beginners in Stock Market Investing
Step 1 – Set Trading Objectives
First and foremost, a trader must know is if he or she is capable of investing at the moment. A person may have the strong intention to dive into the stock market, but if he or she does not have the money to make it happen, then nothing would really materialize.
Ask yourself the following questions:
- Do I have any debts or outstanding balance from any kind of loan?
- Do I have enough savings to pay for my upkeep for three months?
- Is your current monthly income more than what you actually spend in a month?
If you answered “no” to at least one of them, then you must work on making all your answers “yes.” The best time to invest is when you have total financial freedom and security. Once you have achieved your optimum financial state, then comes the perfect moment to be clear in your trading objectives.
Ask yourself the following questions:
- Do you want to trade stocks as a means to gain extra cash flow or you want to set-up a growing fund for the future?
- What are your plans for the money you will earn in trading stocks?
- How much do you expect to earn?
- Do you need instant returns or do you want a slow and steady means to grow your savings?
You can make a list of all the things that you need or want to possess now or in the future. Once you have gathered that info, sort them according to importance or urgency. After you have set your goals, you will now have a better idea of your actual expected earnings.
Step 2 – Study the Stock Market
After you set your trading goals, you move on to familiarizing yourself with the mechanics of the stock market. Learn the basics and the essential components that drive stock trading.
Study Pointers:
- Learn about the marketplaces aka the stock exchanges
- Stock Market Terminologies (Get to know the definition of terms like ask price, bid price, market order, limit order, stop, order, bear market, bull market, etc.)
- Stock valuation (Attempt to master fundamental analysis. This is perhaps the most important part of stock market learning)
- Types of securities to invest on (including pros and cons of each): Stocks, Mutual funds, Bonds, ETFs, Options, etc.
Before you could advance to the next step, make sure you have a firm grasp of the concepts involved in stock valuation. This skill will serve as the core of your trading career. The better you are at valuing investments, the better your portfolio.
You may also re-evaluate your financial plans. Understanding the stock market is knowing there will always be risk. Consider how much you are comfortable dealing with. Once you have adjusted your objectives according to your risk tolerance, you can now carry on to the next step.
Step 3 – Stock Picking
Now that you are acquainted with the essentials of stock trading, you may now pick a stock to invest on. Picking a stock to invest will also involve further research. You may find this tedious but all they studying will pay off when you see the returns on your investments.
When traders pay attention to finding the best-valued stocks, they maximize their capitals and achieve greater possibilities. Even though you must not waste time, a poorly researched investment that was settled out of hurriedness often causes more good than harm to the portfolio. Investment research is a trader’s protection from incurring extreme risks. Like the old saying, prevention is better than cure.
How to research stocks?
- Find out which marketplace offers a specific stock. Take note of their symbols.
- Pick a sector or business that you are familiar with. It is easier to pick profitable stocks if you choose to invest in companies and industries you know. Identify key players and stable companies. Most probably, their stocks also perform well in the stock exchanges.
- Compare similar stocks. Once you have chosen which sector you want to venture into, check out their competition, too. Choose one whose viability is most consistent.
Apply fundamental analysis in determining stock value
To know if the stock is worth its current market value, you need to go deep and analyze its fundamental elements, aka its intrinsic value and economic position. The financial statement of the company can give you useful figures to use for your research. You need to know how much their assets are worth, how much the company has been earning, how much they are spending, how much they are paying their shareholders in dividends and how much they owe from others.
Stocks valuation uses the following metrics for fundamental analysis. Most often, a combination of these measurements is being used to get a clearer picture of a stock’s true value.
- Earnings per Share (EPS)
- Price-Earnings Ratio (P/E)
- Dividend Yield
- Price-Book Ratio (P/B), etc.
Step 4 – Set-up a Brokerage Account
There are some commission-free types of investments that can be transacted directly to the seller. If you decide to buy securities that do not need a broker like common ETFs and index funds, all you need to do is set up an online account to manage and fund your investment. Register through their website and deposit funds so your account can go live.
But if you want to buy stocks that require a broker, like individual stocks or mutual funds, avail of brokerage service that aligns with your specific financial capacity. Brokers offer different services and come in a variety of price range. Take note of their package inclusions, commission rates, and other maintenance costs. You can choose between full-service brokers and discount brokers.
Aside from carrying out your transactions, brokers may also give you investment advice. Read reviews to know which brokerage company is most recommended by your fellow traders.
Step 5 – Activate your account and place an order
This step is the actual buying phase. Now that you have a broker, all you need to do is fund your investment account, then you are good to go.
Using their trading platform, pick out stocks by entering the company name or stock symbol. Take note which stock exchange offers said stock. Are they being traded on the New York Stock Exchange (NYSE) or on NASDAQ?
Check the stock price then indicate the number of shares you want to buy. Some people make detrimental errors in this step by mistaking stock price with the number of shares.
After finalizing the number of shares and checking the total price of the transaction, signal your broker to proceed with the transaction by placing the appropriate order type. Familiarize yourself with the use and combination of market order, limit order and stop order. Most investing gurus suggest limit orders since this type offers the most risk protection. After you set the order type, hit send. Your buy decision has officially been made.
Step 6 – Wait for transaction to push through
After you place your order, your transaction will be reflected in your portfolio once your broker finds the stock you requested. Once the trade has been accomplished, your broker will then charge you commission and other applicable fees.
The waiting game now begins as you wait or watch closely the progress of your stock’s position. Keep yourself updated with relevant economic news and business reports so you can formulate your follow-up investment decisions. Will you buy more stocks or put them on sale? Your next move will depend on what you gather from stock market trends.
Step 7 – Plan your next purchase
Buying one investment is a start. To buy more securities and to diversify your portfolio is the goal of a prolific trader. Look out for opportunities to invest in a variety of investment types. With this strategy, you prevent your portfolio from total loss, in case one sector or company you own sinks or performs poorly in the stock market.
Beginner’s Guide To Effective Stock Market Investing
Cannot get enough of our stock buying strategies? Purchase our book in stock investing to help you become a smarter trader. The book is filled with tried and tested investing strategies from established advisors and traders. Aside from buying tips, we also have selling guidelines and tactics to get the most out of your future trades.
We have created a FREE ebook that will help get you started in the game. Additionally, you can check out our previous blog posts for more information on the industry. Do you have any tips to share with us? We would love to hear your thoughts on the comment section. Let us know what investment topics you would like us to cover too in our upcoming blog posts.