The first time I bought stock in a company was in 2010. I was very hesitant. Mostly because there were a lot of questions running through my head, meaning there was a lot of doubt. I hope to answer some questions I had as a beginner, so you will start off on the right track.
Please take note that I am not a professional financial advisor. I am simply someone who has done some research and purchased stock before. I am not claiming to be incredibly successful. My goal is to share my experiences from buying stock for the first time, and many times after that.
This will just be a general overview. I cant teach you everything there is to know about buying stock, because I dont know everything. Im always learning. But lets get started.
What Is Stock and How to Buy Stock
Just for clarity purposes, when I talk about stock I am talking about owning shares, or stake, in a company. I am not talking about buying stock cars (*chuckle*). When you own stock in a company, you actually own a share of the company and its profits (and losses). There are two main types of stock: Common and Preferred.
Common Stock vs. Preferred Stock
Common stock is just what it sounds like. Its common. Typically when you login to your trading site to buy and sell shares, that is for common stock. Common stockholders face the most risk on their investment. If the company goes bankrupt and liquidates, common stockholders are the LAST to get their money back. Money is (by law) paid in this order: to creditors, to bondholders, to preffered stockholders, to common stockholders. If the company runs out of money before it gets to the common stockholders, then theyre just out of luck. Its important to note that common stockholders receive their proportional share of profits in the form of dividends. They also get a vote for every share to elect the management of the company. Doesnt that make you feel powerful?
How to buy Stock for the first time – Preferred Stock
Preferred stock is slightly different from common stock. These stockholders usually receive a fixed dividend as long as they hold onto the stock. It is also callable, meaning the company has the right to purchase the shares back from preferred stockholders at any time. Preferred stockholders usually dont get the same voting rights as common stockholders.
Voting Rights? Do I Have To Vote For Management?
With all this talk about voting rights, its important to note that you dont necessarily have to participate in anything. If youre just in it for the investment and thats all you want to focus on, then carry on with that. The fact that you have that power is quite intriguing.
What Is The Difference Between Buying Stock Myself And Hiring A Stock Broker?
The difference is literally that if you hire a stock broker you are hiring someone to click the buttons for you. Granted, stock brokers are educated and highly informed individuals. They can provide you with great services and advice. But if you feel comfortable taking care of your investments on your own, then I recommend doing it yourself. Which is what this article is all about.
Where To Buy Stock Online
I personally use USAA. However, I do know that a lot of their services are only available to active U.S. military and veterans. Their investing options may or may not fall into that same category, Im not sure. Feel free to check them out.
There are also several other very popular places to buy stock online. Some of the big names are E-Trade, Scottrade, TDAmeritrade, Sharebuilder, and Fidelity just to name a few. You can do a simple search on Google for buy stock online and you can research the different options.
All the different companies offer different prices and benefits. Some offer a certain number of free trades when you open a new account. Once you reach that limit you will then have to pay a fee to make trades. At that point you will want to ensure you are making the best deals possible, knowing that you will be charged each time you buy or sell. Just look at each of the options and find out what type of plan is right for you.
Stock Market Prices Are Not Set In Stone
You may follow the news and hear something similar to Stock X closed today at $10.50 per share. When you are buying and selling shares its easy to focus on this number as a beginner. While youre shopping for companies, the price per share youre looking at only represents the last recorded price per share that took place. It is not a definitive mark about how much shares are worth. The stock trading websites do their best to display the most live, current information they can. However, there are an unfathomable amount of trades happening constantly. It would be impossible to keep the price per share updated live to the exact penny. Keep this in mind while youre trading. Let me explain.
You may find a company you decide to invest in. You see that this hypothetical company is trading at $11.15 per share. The website will not only ask you how many shares you want, but also how much per share you want to pay. It may seem obvious that the price per share is $11.15, right? So why is it asking me how much I want to pay per share? Its because the websites job is to find someone who is willing to sell their shares for the same price youre asking to buy at. If nobody is willing to sell for that price, then you wont be able to buy any. You basically have to come to agreement with someone else. When you hit GO, the transaction doesnt happen right then and there. It can take minutes or even hours before the system finds the 100 shares you want at $11.15 per share. The transaction may not even happen, even though the listed price per share is the same price that you offered to buy at.
This is where your own ingenuity comes into play. You have to decide if this stock will go up in price or go down in price, and bid accordingly. To come to that determination, you will want to research each company youre interested in investing with. Nobody can predict what is going to happen. Not even the highest-paid advisors. This can become addicting, if you love number crunching and youre not careful. Trust me.
I feel like this trigger thing is something important to talk about. It is possible to set a trigger on USAA (Im not sure about other sites, but I imagine its the same). Basically this is a rule saying something like If Company X falls to $9.45 per share within the next 7 days, then buy X amount of shares automatically. The exact rules vary. You can change it to a certain amount of hours, days, weeks, up to 30 days I believe. Be very careful if you use this. I made this mistake when I first became interested in buying stock.
Its tempting to see a stock at a certain price and think you have this great idea, where if the stock drops to a certain level then Im going to buy all these shares, then when it goes back up, automatically sell them all and make a profit! So you set a trigger to make this happen automatically. From my experience, I strongly urge you to not use this feature.
There was a time I set a trigger like this. If the price fell to or below a certain amount, the system would automatically purchase a bunch of shares for me. However, what happened was the price of the stock actually fell a few dollars below what I was looking for per share. So naturally, the system saw that my condition was met, it purchased my shares from someone at my desired price, and the price kept dropping. Basically what happened was someone else saw that the price was falling, so they sold a bunch of shares to try and make their profit while they still could. Meanwhile, some dumb guy (me) set up a trigger to buy automatically, so that guy sold a ton of shares to me at a price much higher than what the stock was trading for at that time. Had I been sitting there myself, I could have gotten a much better deal. If you want my advice from my personal experience, its this: STAY AWAY FROM THE AUTOMATIC BIDDING.
Where To Get Information About Companies
This is an easy one. My two favorite are Google Finance and Yahoo Finance. They will show you all the stock quotes and more information about each company than you could ever read. They also have very nice graphs where you can compare the history of several companies based on a number of different time frames. Its very useful.
Where To Go To Become An Educated Stock Trader
Investopedia is a great place to start to learn everything you need to know.
What Are Your Experiences?
Do you have a favorite site where you do your trading? Do you have a story to share about trading (good or bad)? Or do you have any tips for us? Please share in the comments.