You might have some money to start investing in stocks, but after hour upon hour or staring at your laptop, researching, and ultimately, getting frustrated. Don’t worry We’ve all been there. There’s a lot of conflicting information out there and a zillion investing tools; it gets overwhelming. Before you buy your first stock, you should definitely understand the following: what a stock is, why people buy stocks, how to buy stocks, and where you can do market research. Then assess your goals, figure out what stocks are best for you, and make your first purchase.
Table of contents [Hide]
Part 1. What are stocks?
Stocks are simply shares of a company that can be purchased and sold by investors. Publicly traded companies sell shares to the general public, and, when a person purchases one or more of these shares, that person becomes entitled to a proportional piece of the profits generated by the company. Oftentimes, these profits will be paid out as dividends or will be reinvested into the company in order to further increase its profits. Check out Benzinga’s How Does the Stock Market work for more information.
Part 2. Why do people buy stocks?
As investing in stocks offers immense opportunities for profit, there are many reasons why one might choose to begin trading.
1. Saving for retirement
Most people don’t envision themselves working into their old age, so many employers offer opportunities to invest in a 401(k) or Roth IRA, which can offer benefits such as tax advantages related to the treatment of capital gains and dividends.
Additionally, many employers will match a portion of your contributions to your 401(k) to help build your retirement fund faster. If you’re interested in learning more about where you can save for retirement, visit our Best Roth IRA Accounts and Best IRA Accounts for more.
2. Personal wealth creation
While many individuals trade stocks as a way to produce a second income, others make their living entirely from investing and trading stocks and build substantial wealth.
Additionally, taxes on long term capital gains and dividends may be lower than the applicable income tax rate.
3. Save for school
Investing can also be a great way to pay for school. Prepaid tuition plans, education savings plans, and 529 college savings accounts allow investors to open accounts and save for future education expenses by investing in select stock instruments.
These plans are generally sponsored by state governments and can be used to pay for all fees related to higher education.
4. Heir inheritance
If you already have enough money to support all of your needs, you may be interested in stocks to create an inheritance to leave to your family. When your heirs inherit your stock, they can reset their cost basis and potentially rid themselves of capital gains tax liability.
5. Donating to charity
Profits from stock can be a great way to generate money to donate to charity. When you donate stocks to charities, you’ll often be able to increase your contribution while experiencing significant tax deductions.
Furthermore, if you donate stock rather than selling and donating cash, you can avoid capital gains taxes.
Part 3: Understand the different types of stocks
Now that you have a hold on typical investing goals, you might want to venture into the different types of stocks.
1. Domestic stocks
Domestic stocks are simply stocks of American companies that can be purchased and sold on the various American exchanges like NASDAQ or the New York Stock Exchange (NYSE). Domestic stocks can be divided into common stocks and preferred stocks.
Preferred stocks require that preferred shareholders be paid before common stockholders and typically have higher and more consistent dividend payments, but a lack of voting rights and capital appreciation. There are also convertible stocks, which act as preferred stocks but can transition between common and preferred stocks under certain conditions.
2. Foreign stocks
Foreign stocks are simply stocks of foreign companies that are traded on foreign exchanges. For example, Nintendo, while very popular in the United States, is a Japanese company which is traded on the Tokyo Stock Exchange.
These stocks can still be purchased by American investors, but require a broker that is authorized to trade on foreign exchanges. These companies may be listed under American Depository Receipts (ADR) which trade like a stock and is issued by a bank representing a certain amount of shares in that company.
Exchange-traded funds, or ETFs, are traded on stock exchanges just like a common stock. However, they do not represent shares of a company. Instead, ETFs are marketable securities which hold assets such as bonds, commodities and currencies that are typically tied to an index.
ETFs are extremely attractive to some investors for their low prices and opportunities for profit.
Just like ETFs, ETNs are traded on major stock exchanges and behave similarly to common stocks. ETNs, or exchange-traded notes, are unsecured debt securities which are issued by banks and are linked to an index.
Part 4: Formulate goal and do research on companies
Before you buy, think about your investing goals. Consider the following:
- Is your goal long-term or short term?
- What’s the exact time horizon?
- How much risk can you handle?
- How do you want your assets allocated?
Once you know, take look at some popular stocks, their performance, and asses. Of course, you may need help with this. Don’t be afraid to call an financial advisor, a trusted friend, or a brokerage to assist you.
Step 5: How to purchase stocks
Find a stock to invest in
Find a company that you are interested in investing in. Picking a stock can be difficult as it can be hard to predict how a stock will behave in the future.
Determine how much you can invest
Making an investment can be risky; you could lose a portion of the money that you put in, so you should be thoughtful in this decision.
Choose a broker, one that fits your needs
For example, if you are interested in trading foreign stocks, you need to make sure your broker is authorized to do so. Don’t know where to start?
Here’s a peek at our favorites.
Commissions0.30% annual fee
Commissions$0 $6.95 for OTC Stocks
Place your order
After you have completed the above steps, all that’s left is to place your order. Your broker will place your order, and, as soon as the shares become available, you will own your first stock.
Investing in stocks comes in the form of trading and investing. Traders typically only hold stocks for short periods of time and are less concerned about the long term fundamentals of a company. Investors look towards a longer time frame and consider how the company will perform now and in the future.
Regardless of which path you choose, it’s important to do your homework and learn as much as possible.