Buying stocks isn't that hard, but you need a little assistance if you've never done it before. On the other hand, being able to earn decent sums of money by playing on the stock market can be very difficult. Many mutual funds lower their indices and this means that even a professional broker can find it difficult. So, take with a grain of salt what you will read in this article.
Steps
Method 1 of 2: Before You Buy
Step 1. Do nothing until it is clear to you what kind of shares to buy and under what conditions to resell them
Go to the library and search online for books and other resources on stock investing. Few excellent texts to begin with include "The Intelligent Investor" and "Security Analysis" by Benjamin Graham and "Common Stocks" by Philip Fisher.
- The general rule is to buy when the price is low and resell when the price has risen. Basically, the ideal is to buy low-cost shares and resell them when they are expensive.
- Let's say you buy 100 shares at a cost of € 15 each. You have invested € 1,500 - If after two years, the price has reached € 20, your investment now amounts to € 2,000, with a profit of € 500.
- Let's say now that you buy 100 shares at a cost of € 50 each. You have invested € 5,000. If, after two years, the price has collapsed to € 25, your current investment amounts to € 2,500, with a loss of € 2,500.
- If the price of a share of a certain company is € 100 and the company has issued 500,000 shares, its market cap would be € 50,000,000.
- Therefore, a company whose share is worth € 7 may have a higher market cap than a company whose share is worth € 30 - if the first company has issued five times the number of shares issued by the second.
- The market cap is the global value of all the shares of a company e Not the real value of the company. Investors make a reasoned hypothesis about the value of a company; there is no scientific method to deduce it, since you are formulating a reasoned hypothesis about what the company could do in the future.
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The price of a share salt when buyers prevail. Instead, the price goes down when sales prevail. Therefore, the price of a given share is a reflection of people's opinion on the good performance of the company and not necessarily a magic formula that says what the solidity of a company is.
- In this way, a company can have a high share price and many shares and still be overrated compared to the real situation. Similarly, a company can be undervalued even if it has a mediocre share price and fewer shares, as people think the company is less viable than it actually is.
- Your goal in stock trading - in addition to buying and selling at affordable prices - is to find stocks that are currently undervalued to buy and find overvalued stocks to sell.
- The price of a share is also due to the performance reports, released by companies four times a year. If a company releases large-income reports, its shares will likely go up. On the contrary, if these reports indicate lower than expected revenues, the price is destined to fall.
- Mutual funds are a collection of stocks grouped into a sort of basket. There can also be 100 different stocks in a fund, for example. So if you buy mutual funds, you are investing in many different stocks. If the value of a single company in the fund increases, the overall effect will be almost imperceptible. Similarly, if the value of a single company falls, it won't affect your overall investment much.
- Buying single stocks is riskier than buying mutual funds. At the same time, the potential gain is higher. By buying single stocks, if the price falls, you have lost a large part of your investment. Conversely, if the price skyrockets, you have earned a lot more than what a mutual fund would have made.
- Analyze the budgets and income from the past 10 years to see if they are doing well. Heavily indebted companies with low profits must be quickly eliminated from the choice.
- Read the annual and quarterly reports carefully (which are indicated respectively with the abbreviations SEC 10-Ks and 10-Qs). Explore the company's website, if available, and read the analyst reports.
- If you have found a company that convinces you, you should talk to customers, competitors, suppliers and finally with the executives themselves to get a clearer idea of company activities.
- Establish the ideal purchase price. For example, let's say, after careful analysis, you decide to buy stock in Minnesota Mining and Manufacturing (3M), but the current price of $ 95 per share is a bit high. You would like to buy them for no more than $ 80. If you take a look at the price history site, you will realize that the stock actually has a high price, since last year it fluctuated between $ 80-90, while two and a half years ago it was even at $ 45. So, imagining buying for $ 80 is quite reasonable. And why not at $ 75?
- The key to a successful investment is to stick to the long-term strategy. Once you have established the purchase price and the stock reaches it, you have to buy and you have to continue buying if the price drops further.
- Most stock plans have a minimum monthly investment, which is directly withdrawn from your bank account.
- Pay close attention to the fees you pay. Only a few companies, such as Procter & Gamble (see website here), do not charge fees for their investment plans.
- Investment plans allow you to reinvest all dividends automatically. The dividend is a payment made to shareholders, which is based on the company's profits. Some companies also apply a discount, around 5%, to encourage the reinvestment of dividends.
- Many American brokerage firms provide for a commission of less than $ 10 per single transaction, regardless of the size of the transaction. In some cases, if you fall within certain parameters, you will be offered a certain number of free operations, so read the conditions of the contract carefully before trusting a broker. The best brokers also offer commission-free dividend reinvestment, good customer service, and diverse client research tools.
- Send a certain amount as an initial deposit, so that your purchases can be made, agreeing the amount with the broker. Some companies do not require any deposits.
- Your broker must report your operations to the Revenue Agency. You will need to fill out a form to be returned to the company, probably before starting your first trade (the broker will send you the necessary forms.)
- Choose the stock you have selected, indicating to the broker the company symbol (a 1-5 letter code), the target price per single share, the number of shares to buy and the time period during which your bid will remain valid (e.g. at the opening or for the entire session). Alternatively, instead of indicating a precise price, called the limit price (limit order in English), you can also send a buy order at the market price, for which your order will be processed immediately, at the price valid at that same time.
Step 2. Do not confuse the share price with the value of a company
The value of a company is yours market capitalization, referred to as market cap. The market cap is determined by the product of the share price and the total number of shares issued.
Step 3. It is important to understand some basic concepts on actions
Succeeding in the stock market depends on being able to understand what the future earnings of a particular company will be. It's guessing, it's a bet. Share prices are deeply influenced by people's opinions about a company's capabilities, rather than by the intrinsic value of the stock.
Step 4. Get your accounts in order
Try to pay off as much debt as you can and minimize the loans you are taking out. Ideally, all loans with the highest interest rate should be paid first and the only mortgage you can afford is a first home loan. Put the amount to pay for the next 3-6 months in a dedicated account before you start playing on the stock market.
Step 5. Think carefully about how well the stocks fit your overall financial strategy and whether it is better to buy stocks or mutual funds
Step 6. Don't overlook anything
Analyze the company well before buying its shares. Basically, you need to be able to predict how well that company will do in the future. Start browsing finance sites to get an idea of the business and key financial parameters.
Step 7. Make a list
Theoretically, you have to write down the shares of large companies that you intend to keep through thick and thin. Warren Buffet, one of today's largest investors, said that if you are not sure you can hold a stock for at least 10 years, you shouldn't consider holding it for even 10 seconds.
Method 2 of 2: How to purchase
Step 1. Direct purchase
Some companies offer stock purchase plans. Search the Internet, call or write a letter to the companies whose shares you would like to buy, to ask if they offer a similar purchase plan; ask to be sent a copy of their prospectus, the necessary forms and any other kind of information.
Step 2. Use an online brokerage firm
Search for "online brokerage firms" (or "online discount brokers", if you have no difficulty with English) on a search engine to find brokers that allow you to buy and sell shares online. Make sure you compare the fees they charge and most importantly that there are no hidden fees before requesting their services. Reducing commissions and miscellaneous expenses is one of the keys to a successful investment.
Step 3.
Alternatively, use a full service broker.
Some firms, known as full service brokers, provide additional services, such as investment advice and better research services, but charge significantly higher fees. Since these commissions are their main source of income, they will tend to encourage the number of trades, regardless of whether they are in your actual interest.
Advice
- Before buying anything, stop. Observe. Learn. Use simulations. Don't trust anyone, not until you've confirmed that their advice is reliable. Attend reputable financial forums such as trade2win or moneytec. You will find most of the companies there along with a bunch of dissatisfied customers.
- Use the "stop losses" option (literally, "stop losses") while doing a trading simulation. If you see that it's okay, apply it before any purchase in no uncertain terms. An order with the 'stop loss' option implies that if the stock falls below a specified price, it will be sold automatically. For example, let's say you own 100 Union Pacific (UNP) shares and the stock trades at $ 100. If you set the 'stop loss' option at $ 90, when the stock drops to that price, your shares will be immediately placed on the market for sale. Know that if the price drops dramatically, your sell order could also be executed at a price well below that set with the 'stop loss'. To protect yourself from such an event, you can place a stop limit order, that is, the action drops to the stop limit price that you have indicated, your order becomes limited to that price and does not guarantee that the order will be executed. Don't make impulsive decisions! Keep in mind that, in high volatility markets, a stock can easily lose 50% to quintuple its value immediately afterwards. It is good to buy at a low price to resell at a higher price, rather than buying at a high price and groped for speculation, selling at an even higher price.
- Do not invest large sums in a single company, to protect yourself from specific business risks (ie, the risk that a single action may fade due to unexpected negative business developments); a balanced portfolio tends to increase in value over the long term.
- In the US, stock market investors are protected by a federal body, called the Securities Investor Protection Corporation, up to an investment of $ 500,000. If your investment with a single broker exceeds this figure, try to diversify it among different brokers, to counter the risk that a single company could go bankrupt.
- Most of those involved in "day trades" (ie stock trading that runs out in 24 hours) lose money and only a very few of those involved in fund management beat the indices indefinitely. It is easy to buy and sell shares, but it is difficult to make money. So look for a system, check it out and then always use it!
- There are many opinions available from worthy specialists, but it is also true that there are just as many opinions that seem equally credible and that are in fact wrong and lead to disastrous consequences.
- Assuming that you must necessarily "diversify" your portfolio by entering shares of different companies, first buy shares of companies whose field of activity is familiar to you. (for example, technology stocks if you are familiar with technologies, automotive stocks if you read many trade magazines, etc.)
- Depending on the brokerage fees, it will be difficult (or time-consuming) to recover an investment of less than $ 1,500 on any single stock purchase.
- Instead of indicating a specific purchase price (and a period of time), you can buy at the market price and the order will be executed immediately.
- Index funds are passive funds that simply replicate the global performance of the market. They are an alternative to equity investing and are a balanced and low-cost type of fund (low or no commission) that performs well in the long term.
- Keep in mind that those who promote an action do so only because they want to sell. In other words, it's just about advertising a product that needs to be sold. This view is called "contrarianism." So when you're told to buy, it's actually time to sell, or if you don't hold any of those stocks, don't even dream of buying! Always check everything. On the contrary, if someone says to sell, it could be an opportunity to buy, so analyze the action well.
- Mistakenly, it is often believed that, to buy shares, one must necessarily contact a broker. That's not the case. If you think you are up to it and if you have the necessary experience, you can make deals in first person without intermediaries. While this possibility is not considered by most beginners, it is still something worth paying attention to once you have some experience in the field.
- Always keep a meticulous archive of all trades, indicating the action, the size of the trade, the total cost (i.e. the price you paid, including any commission and any adjustments), the sale price and the dates on which transactions have been made. You need this information to calculate capital gains taxes. From time to time, you will need to adjust the cost base to have capital return, share splits, depreciation, derivatives, dividend distributions, etc.
- Most brokers require a fixed commission per transaction, which does not take into account the size of the investment, although some apply a commission per single share.
- Several authoritative texts and "bibles" on trading - in particular on technical analysis - contain concepts repeated so much that they are considered real facts, without ever having been proven! If you don't believe it, write the price of a stock in a spreadsheet and check the methods of crossing the moving averages, recommended in every technical analysis text, and tremble at the thought of how much money you would have lost! It is not as simple as it is described.
Warnings
- Don't use market orders for low-traded stocks, use limited orders only. Little traded shares have very large fluctuations, which means that a market order can be fulfilled at a cost much higher than the price of the last session.
- Avoid the frequent mistakes of newcomers, especially speculation. Speculation comes in different forms, for example: buying and selling too frequently, trying to make a quick profit within a few months; buying the hottest stocks (ie the stocks that have recently had the biggest gains), also known as "momentum investing"; indiscriminately buy stocks that have recently lost the most or have traded at very low prices; buy "penny stocks", that is shares, mainly of the American markets, listed for less than $ 1; buy shares on margin; short sell or sell to one or more third parties the securities not directly owned by the seller; purchase options and financial "futures". Speculation is a long-term losing strategy. If you are not fully convinced that you want to speculate, do some simulation first, without buying, but just pretending to buy and sell stocks and write everything down on a spreadsheet or sheet of paper. For each transaction, remember to include fees and taxes.
- Don't contaminate your judgment with emotional facts or bias when buying stocks. If you love Nutella, that doesn't mean you have to buy Ferrero stock. Even the best products can be marketed by companies that have bad administrators who can raze them to the ground.
- Be cautious when using margin when buying shares. To take advantage of the use of margin, you must fill out a form together with your broker, in which you confirm that you are aware of the risks involved in this type of operation. Margin allows you to buy shares by paying only 50% of the actual cost in cash and borrowing the remainder from your broker. For example, if you have a deposit of € 5,000, you can make purchases of up to € 10,000. After that, if your share loses 50%, the broker will make a “margin call”, that is, it will advise you to introduce more money on the deposit, otherwise everything will be automatically sold to prevent your account from going red. Since stock market fluctuations are the norm and can also be very volatile, use margin by being aware of the risks.
