When tasked with making their first stock purchase, the average person is often unsure about how to proceed. Even those who have done their homework to learn about the stock market and choose the best stocks for their purposes may not understand exactly how to perform the transaction.
The following is a brief guide to making an initial stock purchase, including the considerations that should go into such a purchase:
Make sure you’re ready to purchase stocks.
Being ready means more than having sufficient expendable income to buy a stock. Sometimes, even when that extra money exists, it is better to allocate it elsewhere. For example, paying off credit cards should take precedence over investing in stock because the returns on these investments will very rarely exceed the interest charged on credit card accounts. Individuals should also prioritize growing an emergency fund over investing because people can incur serious debt without such savings. Individuals are really only ready to invest when they have extra cash at the end of each month that they will not need in the immediate future. In this case, investing is a great way to grow that money.
Consider all investing options.
People tend to invest in stocks because of the way stocks are represented in popular culture. However, stocks are not always the best option, especially for people who can only purchase one or two stocks. This lack of diversification can cause problems down the line. More stable investing options include bonds or mutual funds. With a mutual fund, individuals get the benefits of diversification without needing to devote as much money to investing. A mutual fund is a team of investors that reinvests the money it receives and then pays out gains to shareholders based on the size of their investment.
Research the company, not just the stock.
Many individuals choose to make a stock purchase after receiving a tip from a trusted friend. Tips like these are not sufficient information on which to base a purchase decision. Similarly, following ticker symbols gives potential investors only a small part of the story. People need to take the time to thoroughly research any company whose stock they are thinking of buying. Is the company selling a good product at a competitive price? Does the company have a strong user base and operate in an ethical manner? These questions are more important to a long-term amateur investor than they would be to a professional trader, who may quickly buy and resell to turn a profit.
Open an account with a brokerage.
A brokerage is a company that people use to buy and sell stocks. Today, most people take advantage of online brokerages, although in-person options also exist. However, these latter options do not offer the same convenience and speed that can be very important in trading stocks.
Rather than select the first online brokerage they find or choose the biggest name they know, people should spend some time thinking about what they want out of a trader and determine the type of fee structure that would be best for their needs. With this legwork done, it becomes easier to identify the best brokerage. Once the account is open, individuals need to put money in it. Many brokerages allow individuals to set up for direct deposits directly into the account from a paycheck.
Some companies offer direct stock purchase plans that eliminate the need for a broker. If individuals are only purchasing stocks from one or two companies, this route can save them money and time. People should directly contact companies for more information about these plans.
Make the purchase.
Once someone opens a brokerage account or sets up a direct stock purchase agreement with a company, it is time to buy. Brokerages usually have online portals for buying and selling stocks, complete with step-by-step instructions. Typically, investors open the order page, search for the company using the ticker symbol, and then fill in the details of the purchase, such as how many shares to purchase and whether to issue a market or limit order. A limit order tends to be best for beginners because they can set it for purchases only at current stock prices and lower so there are no surprises regarding the price. Amateurs may also want to stagger purchases instead of buying a bunch of stock all at once. For example, they should buy a third of the intended total on the first purchase and then repeat the process the following two months.
Avoid becoming obsessive.
Purchasing one’s first stock is a very exciting occasion. As a result, many buyers want to constantly check on the performance of their stock. However, doing so can quickly become stressful due to the market’s wild and rapid fluctuation. Further, if the stocks are a long-term investment, then these minor fluctuations do not matter. People should focus instead on overall trends. Looking at the fluctuations can cause a great deal of stress. Rather than follow stock prices every day, it can often make more sense to investigate the company and its performance by reading quarterly reports and press releases.