How to buy stocks, a definitive, no frills guide
So, you want to learn how to buy stocks? We know the world of investments can be daunting at first. But if you are reading this, there is no doubt you have an itch to understand more about equity trading and how to participate in the world of capital markets.
What do you need to start investing in stocks?
Such as with any job or hobby you need the right tools and equipment, some practice, and also a taste of authentic experience. Some will take this as a hobby, and others will take this as a full-time job. Regardless of which way you feel is the right way for you, we are here to help you hit the ground running.
What is a stock?
A stock, in the sense that we are talking about, is a share in a publicly traded company. Other variations of this are ETF’s, which is a basket of shares built for different purposes that we will touch on this later. Conceptually, buying a share of a stock is being able to participate in the growth and income streams of a company, which we would hope are going to be positive. Just to give you an idea of potential returns on the stock market, here is a 10 year history of the S&P500.
What you are looking to achieve can be any one of 3 things:
Capital appreciation – This comes in the form of organic growth of a company as it generates revenue, creates a profitable business and ultimately increases its value.
Dividends/income streams – In many situations investing is not all about hitting a 1000% return on a biotech penny stock. For many people what is more prudent, and sensible, is to take a few companies in a high dividend industry and collect income streams as they pay them throughout the year.
Short-term gains – This may incur an image of someone trading with 4 monitors and plugged into the world happenings. However with the right approach many investors find this a more viable and interesting way to participate in the markets and they seek many trades with the goal of quick profits over a short time period.
So, you want to buy stocks, what tools will you need?
Just as executing any work, you will need some equipment to get started. Regardless of what kind of investment style above suits you, you will need a broker. This comes in the form of an online stock broker which allows you to trade from your computer or mobile device. Describing all the features and pros/cons of these brokers is beyond the scope of this article and you can see our analysis of the Canadian online brokerages.
When you are all set up with your brokerage account, which involves providing proof of who you are and funding it, then you are ready to get started. The scope of the various markets is huge, and being able to filter out noise is one of the first objectives of a prudent investor. Using stock screens will enable you to work down your options. A quick google search should find you many, but whichever online broker you choose will most likely have a better one available.
What exactly am I screening for?
On a very high level, what you are looking for in a company is easy. In practice it is more arbitrary.
Stop and think for one second!
Let’s say you have a friend asking you to invest with them, you would help them out for several reasons. The potential for future return, an ongoing source of income, or a solid business with a great model and resilient earnings. Sound familiar? It should remind you of the 3 reasons earlier. Capital appreciation, dividends, and short-term gains.
Some of the things that will help you here are the following, depending on your goals.
Market Capitalization – Market Cap is basically how big a company is, this allows you to filter big companies from the small ones, usually leaving you with the major players in the industry.
Dividend Yield – Dividend yield is how much a company pays out to its shareholders, again, looking back to the company income streams. You will usually find higher dividends in more stable industries such as financials and utilities, where they compensate for mostly slower growth, with higher yields.
P/E Ratio – We get into the technical end of the PE Ratio here, but what you need to know is that this ratio compares companies to each other. By comparing their price divided by their earnings, you can see what the market thinks of the stock. Note however, that not all companies are similar to each other and you really want to be comparing apples to apples, and the industry as a whole.
A note on ETF’S
ETF’s are growing exponentially in popularity as more and more investors look for ways to invest with lower barriers to entry. An ETF is an exchanged traded fund, which is a basket of stocks. Instead of you filtering and buying multiple securities, you can buy one package of everything at an extremely low fee. Some brokerages also have the advantage of not charging commissions on certain ETF’s. An example of this is that you can get an ETF that covers the entire TSX index or all the mining companies in Canada. Now in this situation you can buy one simple product, as opposed to buying thousands of individual stocks. Of course the main benefit here is allowing you to get exposure to certain industries, or just invest passively where you have a lot of diversification to minimize your risk.
As far as markets go, if you are in North America you will usually be limited to Canada and the United states, which are very well regulated markets. The two main organizations are the Toronto Stock Exchange and the New York Stock Exchange. There are many exchanges interlaced, but at this level it is really just buying Canadian vs US companies. Watch out for which online brokerage account you use, as different ones may give you more access to markets outside Canada and the US should you choose to invest elsewhere.
So there you have it, a no frills basic introduction to buying stocks. The bare bones of what you need to start. Remember, at one point even the most established investors today were asking how to buy stocks. To sum it up:
- Find your investment style and goal.
- Find a broker you are comfortable with that caters to your needs.
- Filter, and narrow down the companies that fit your objective.
- Read, and read, and read!
After all, knowledge is power, and hope is not a strategy.