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Buying Stocks - The Ultimate Guide To Assess And Purchase

If there was ever a good time to start investing in stocks, it’s now. 2021 saw the rise of meme stocks where familiar brand names like GameStop and AMC shot up in value around 400% and 600% respectively before the end of the year. It seemed like more people than ever had FOMO (fear of missing out) and wanted to get in on the action. 

While there’s certainly a lot of money to be made in the stock market, it also doesn’t take much to lose it all. Not every publicly traded company meets its expectations, beats out the competition, or has the right leadership. In some extreme cases, they may even fail to turn a profit or file for bankruptcy.

There have been countless stories of people who were absolutely certain that one company or another was going to be the “next big thing”. But then they ended up losing every penny that they poured into it. With the possibility of so much financial loss, how’s an investor supposed to know which stocks are the right ones to get?

The best way to buy stocks is to be strategic, analytical, and consider securities with the best long-term potential. Investors who focus on the fundamentals instead of speculation while also mitigating the possible downside through diversification will see far better returns over the years.

In this post, I’d like to demonstrate how an investor can go about buying stocks. We’ll talk about what kind of brokerages to use, how to evaluate a stock, and how to invest for the long term.

How to Buy Stocks

Long gone are the days when an investor had to call up their broker and order a trade by phone. Thanks to the Internet and smartphone apps, the process of buying a stock can be as easy as a few clicks. Here’s how to get started.

Pick Your Stocks

Before logging on to a brokerage and making trades, an investor should know exactly which stocks they want to buy and why. This will involve making a list of potential candidates, doing some research, and making some comparisons. We’ll cover go through what to look for in more detail in the next section.

Choosing a Brokerage

To buy a stock, an investor will need to go through a brokerage. A brokerage is a company that takes orders for stocks from individuals, makes purchases at the stock exchange on behalf of their clients, and then transfers ownership of those shares to their accounts.

There are several types of brokerages:

  • Traditional brokerages – These are classic, well-known financial institutions that have been in business for decades. Traditional brokerages are often more expensive, but they can offer a full suite of financial products and services that online brokers can’t. They usually have both brick-and-mortar locations as well as online platforms. Examples include companies like Fidelity and Schwab.
  • Online brokers – Also called discount brokers, these are financial companies that specialize mainly in stock trading. They usually exist online only but often have customer service representatives available for those users who need help. Because of their lower overhead, online brokers are typically cheaper than traditional brokerages. Examples include companies like M1 Finance and Robinhood.
  • Robo-Advisors – These are investment apps where a computer algorithm picks your stocks or investments for you. They are simple to use but lack any human interaction. Examples include companies like Betterment and SoFi.

Aside from the setup and features of the brokerage, investors will want to consider:

  • Fees – How much does the brokerage charge for each trade? Are there any additional costs for maintaining the account?
  • Minimums – How much do you have to invest to start an account? Some may have a $1,000 minimum whereas others may require $0.
  • Research – Some platforms provide their users with all the information they could ever want. Others may only provide a very minimal amount.

Bonus tip: Savers who are already contributing to a 401k retirement plan at work might already have the option to buy individual stocks. To know for sure, they can check with their plan administrator.

Designate the Tax Structure of Your Brokerage Account

When opening an investment account, users will be given two options. They can set it up as either a:

  • Taxable account – All earnings will be taxed according to the normal IRS rules. However, there will be no restrictions on the number of contributions and withdrawals they can make.
  • Retirement account – Earnings and some contributions will be tax-advantaged depending on if the account is opened as a traditional IRA or Roth IRA. This will depend on your adjusted gross income. However, contributions and withdrawals are subject to IRS rules and restrictions.

Fund Your Brokerage Account

Before a stock can be purchased, money has to move from the investor’s bank account into a small holding account with the brokerage. This is to ensure that the investor has the funds required to cover the order before the actual security is purchased.

Some brokerages may do this per action (i.e., the transfer is initiated at the same time the order is placed). Others might require that the investor moves the money ahead of time before any orders are placed.

Choose Your Stock Order Type

Once funding has been initiated, stocks can now be purchased. Orders can be placed as one of three types:

  • Market order - This is the most common type of stock buying order. Shares are bought or sold at the market’s current available price. Transactions will appear to happen almost immediately even though they are technically handled on a first come first serve basis.
  • Limit order – This is a special type of order to buy or sell a stock at a specific price. For instance, an investor who is interested in a stock that’s currently trading at $100 might place a buy limit order if the price drops below $90. Or if they already own the stock, they might put a sell limit order at $110 so that they can make a profit.
  • Stop order – This is essentially the inverse of a limit order. A stop order protects the investor by canceling the sale of shares once it reaches a minimum threshold (if the stock price dips too low) or canceling the purchase of shares if it reaches a maximum threshold (if the stock price goes too high).

Manage Your Stock Portfolio

Buying a stock is just the beginning. As investors look to grow their fortunes, there will be plenty more to do from that point forward such as:

  • Researching more new stocks to buy
  • Buying more shares of existing stocks
  • Selling underperformers
  • Deciding if they’d like to reinvest dividends
  • Rebalancing 
  • Tax reporting
  • Implementing other risk mitigation strategies

Investors will want to get into the habit of logging in to their accounts every so often and making adjustments as needed.

Assessing A Stock

Between the New York Stock Exchange and Nasdaq, there are over 12,000 ticker symbols for investors to choose from. With so many different options, what makes one stock more attractive than another?

Start with an Analytical Approach

One of the great things about investing in publicly traded companies is that all of their financial information is readily accessible. Investors can look at the latest earnings, revenue, debt levels, etc, and then make an analytical determination about if the company would be a good pick or not.

Here are some of the most commonly used stock evaluation metrics:

  • Earnings per share (EPS) – The company’s latest earnings dividend by its number of outstanding shares. This gives the investor a way to compare two companies by determining how much “profit” they can buy with each share. It also removes the current stock price from the equation which will help the investor focus more on the fundamentals of the company.
  • Price-to-earnings (P/E) ratio – The current stock price divided by the earnings per share. This is a sage metric used to tell the investor if the stock is under or overvalued. Generally, stocks with lower P/E ratios indicate that although the stock may be trading at a lower price its earnings are strong and the share value may potentially rise in the future.
  • Price/sales (P/S) ratio – The total value of all outstanding stock shares dividend by the last 12 months’ revenue. Similar to a P/E ratio, the P/S ratio can help put perspective on companies that may be under or overvalued. However, the use of “sales” instead of “earnings” may be more appropriate for companies that are going through a growth period. 
  • Price-to-book ratio – The company’s current share price divided by its book value per share. Book value refers to how much the company is intrinsically worth; in other words, its assets minus liabilities. This metric can be helpful for picking companies that have a strong financial foundation and avoiding ones where they may be overextended in debt.  

You don’t have to look too hard to find these metrics. Visit any major financial media platform (such as Yahoo Finance or Google Finance) and all of these metrics will be there. Here’s an example for Apple (ticker: AAPL)

buying stocks

Consider the Qualitative Aspects

Sometimes to get the complete picture of how successful a company might be in the future, an investor will need to consider more than just the financial metrics. They’ll also want to think about the qualitative aspects such as:

  • How much demand is there for the company’s product or service?
  • Does the company have a competitive advantage?
  • Will it serve an industry that’s positioned to explode in popularity?

For example, think about the upcoming industry trend to move towards electric vehicles. Are there some lithium battery companies that will benefit from this move in the next ten years? Are some of them already leaders in this field or publicly establishing relationships with the automakers? 

Those are the kinds of things that you won’t find in the stock metrics. But they are still important to consider as they can have long-term implications on the performance of the stock.

Don’t Listen to Hype

It’s important for investors to separate themselves from their emotions. There’s actually a whole field on this topic known as emotional investing. Research is done to find out why we give in to fear and greed, make impulsive decisions, and what can be done to save ourselves from sabotaging our finances.

For this reason, investors would be wise to not listen to any media hype about stocks. There are well-known TV personalities, so-called experts on YouTube, and social media influencers who will try to persuade you into thinking that they know what a company’s share price is going to do next. But don’t believe it.

No one, and I mean no one, can consistently predict when a stock is going to go big. Just like a coin flip, there will be a few times when someone might guess and get it right, but they’ll never be able to keep it up over the long term. The best thing an investor can do is avoid the noise and invest in a company because the fundamentals make sense and the path for success is clear.

Buying Stocks for Long-Term Investments

Some people out there may be hoping to get rich quickly off of stocks. But in reality, the easiest way to build wealth is to play for the long game.

Determine What kind of Investor You Are

When it comes to investing, the old cliché is “the greater the risk, the greater the reward”. However, investors who get too caught up chasing after high rewards underestimate the possibility that those risks may not pay off and that they could lose everything.

For that reason, investors need to be very honest with themselves. They should only invest in companies that they feel comfortable supporting. If a stock feels too risky and is going to cause them to lose sleep at night, then that’s not the investment to go with.

Diversify Your Risk

Owning shares of any one stock is a pretty risky proposition. What if the company hits a rough patch and the stock price goes down? To get around this, experts recommend having a portfolio of at least 20 to 30 different companies.

Looking at the broader picture, it will also be helpful to buy shares of companies from different categories. A great way to visualize this is to use the classic Morningstar Style Box. This illustration is commonly used to help structure your investments in terms of:

  • Company size: small, medium, and large
  • Investment style: growth, value, or a blend

Depending on an investor’s desired returns and tolerance for risk, they can pick companies from each of these boxes that align with their goals.

buying stocks

Be Prepared for Market Turbulence

Sometimes no matter how well a company is doing, the overall stock market might still go into a slump. This could be because of a multitude of reasons: politics, war, announcements from the Federal Reserve, etc. 

One event that’s still fresh in the minds of many people is the stock market crash that followed after COVID-19 started spreading in America. At the start of 2020, nobody would have predicted that the market would crash due to a worldwide pandemic. But it did. 

These things happen, and when they do, all that can be done is to wait until the market recovers. Or, if you want to be a really savvy investor, you can buy up stocks while they’re trading at a discount and cash in once the market eventually goes back up.

Don’t Try to Time the Market

It’s a given that the market will go up and the market will go down. But no one knows when this will happen or by how much. So don’t fool yourself into thinking that you can predict this. The best approach any time you want to invest is just to do it periodically at regular intervals. This way you’ll capture gains through what’s called dollar-cost averaging and have far better chances of making money over the long haul.

Ask for Guidance

Whether this is your first time or hundredth time buying a stock, there’s always going to be questions in your mind or things that you maybe didn’t consider. Sometimes what you need is just a little bit of guidance, and that’s exactly why we created the Market Insiders program.

The Market Insiders is a weekly coaching program where experienced mentors will work with you to refine your strategy. They’ll share their insights and help you to optimize your returns while also lending some tips for protecting against the downside. 

Click here to find out more about the Market Insiders program.

Alternatives to Buying Individual Stocks

For investors who are still unsure about which stocks to pick, there are some financial products they can buy that will essentially pick their stocks for them.

Mutual Funds

A mutual fund is a large collection of stocks and other assets (sometimes thousands) that are purchased with the pooled money from multiple people. Investors will buy shares of a mutual fund, and the fund manager will determine the strategy, which securities to buy, when to trade, etc.

Mutual funds are available through traditional brokers and some online brokers. They also make up the large majority of most 401k retirement plans.

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds. They pool money from their investors and then buy large amounts of stocks and other assets.

The major difference is that an ETF can be traded in the open market like a stock. Whereas mutual fund values aren’t recalculated until the end of the day, ETFs values can fluctuate in the open market and are susceptible to marginal buying / selling opportunities. 

ETFs can be purchased with almost any broker or retirement plan that allows the purchase of stocks. ETFs are also a favorite investment tool for robo-advisors.

Is Buying Stocks Right for You?

Investing in stocks can be exciting, but it can also be financially dangerous when done incorrectly. The best approach an investor can take is to set aside their emotions, choose securities based on their fundamentals, and pick the securities that are going to be the best long-term prospects.

The way an investor buys a stock will depend on the type of broker they use. Investors can choose from an array of full-service to bare-bones platforms. Be aware of the fees and minimums, and don't forget to designate it as a regular taxable account or a retirement plan.

When it comes to picking stocks, there are dozens of metrics that can be used to reveal the financial health of a business. Combine these with the qualitative merits of the company to get the complete picture. At the same time, avoid listening to any media noise.

Investors who get into stocks with a long-term mindset will have the greatest chances of success. By understanding your own tolerance for risk, diversifying assets, and not trying to time the market, investors can optimize for growth while minimizing the potential downside.

Anyone who's not comfortable with buying individual stocks also has the option to buy shares of mutual funds and ETFs. Both types of assets pool the money from investors and use them to buy hundreds or even thousands of stocks all at once.

Remember: Buying a stock means buying a share of the earnings that a company will work to produce. The more high-quality ones you own, the more businesses you’ll have working for you and adding to your personal wealth. But none of it starts until you take that bold first move and start investing today. 

By Market Insiders