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Joseph Mitchell
Joseph Mitchell

Basics Of Buying Stocks



Full-service brokers provide well-heeled clients with a broad variety of financial services, from retirement planning and tax preparation to estate planning. They also can help you buy stocks. The trouble is full-service brokers charge steep commissions compared to online brokers.




basics of buying stocks



For wealthy individuals without a lot of extra time to stay on top of their complicated financial lives, full-service brokers offer special treatment as well as a high level of trust. If all you want to do is buy stocks, a direct purchase plan or an online brokerage is a better choice.


There are thousands of different publicly traded companies offering shares of stock on the market. That makes it daunting to decide which stocks to buy. One way to think about researching the stocks you want to buy is to adopt a well-thought out strategy, like buying growth stocks or buying a portfolio of dividend stocks.


Whichever strategy you choose, finding the stocks you want to buy can still be challenging. Stock screeners help you narrow down your list of potential stocks to buy and offer an endless range of filters to screen out all the companies that do not meet your parameters. Nearly all online brokerage accounts offer stock screeners, and there are more than a few free versions available online.


With a stock screener, you can filter for small-cap stocks or large-cap stocks or view lists of companies with declining share prices and stocks that are at all-time highs. They also generally let you search for stocks by industry or market sector. Filtering by P/E ratio is a great way to find shares that are overpriced or underpriced.


An alternative to individual stocks is an index fund, which can be either a mutual fund or an exchange traded fund (ETF). These funds hold dozens or even hundreds of stocks. And each share you purchase of a fund owns all the companies included in the index.


The stock market is really a way for investors or brokers to exchange stocks for money, or vice versa. Anyone who wants to buy stock can go there and buy whatever is on offer from those who own the stock. Buyers are expecting their stocks to rise, while sellers may be expecting their stocks to fall or at least not rise much more.


1. Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called "income stocks."


Some companies also issue preferred stock, which usually guarantees a fixed dividend payment similar to the coupon on a bond. This might make preferred stocks attractive to people looking for income. Dividends on preferred stock are paid out before dividends on common stock.


Industry experts often group stocks into categories, sometimes called subclasses. Each subclass has its own characteristics and is subject to specific external pressures that affect the performance of the stocks within that subclass at any given time.


Stocks can also be subdivided into defensive and cyclical stocks, depending on the way their profits, and their stock prices, tend to respond to the relative strength or weakness of the economy as a whole.


Defensive stocks are in industries that offer products and services that people need, regardless of how well the overall economy is doing. For example, most people, even in hard times, will continue filling their medical prescriptions, using electricity and buying groceries. The continuing demand for these necessities can keep certain industries strong even during a weak economic cycle.


Growth stocks, as the name implies, are issued by companies that are expanding, sometimes quite quickly, but in other cases over a longer period of time. Typically, these are young companies in fairly new industries that are rapidly expanding.


Value stocks, in contrast, are investments selling at what seem to be low prices given their history and market share. If you buy a value stock, it's because you believe that it's worth more than its current price. Of course, it's also possible that investors are avoiding a company and its stock for good reasons and that the price is a fairer reflection of its value than you think.


You can place buy and sell orders for stocks online, through a mobile app, or by speaking with your registered investment professional in-person or over the phone. If you do trade online or through an app, it's important to be wary of trading too much, simply because it's so easy to place the trade. You should consider your decisions carefully, taking into account fees and potential tax consequences, as well as the impact on the balance of assets in your portfolio, before you place an order.


When you buy stocks on margin, you borrow part of the cost of the investment from your brokerage firm in the hopes of increasing your potential returns, which can magnify both your gains and your losses. For this reason, it's important to understand how margin accounts work and the risks associated with buying stocks and other securities on margin. Learn more about margin accounts.


Short selling is a way to profit from a price drop in a company's stock and, like buying on margin, tends to be a short-term trading strategy. It involves more risk than just buying a stock. To sell a stock short, you borrow shares from your brokerage firm and sell them at their current market price. If that price falls, as you expect it to, you buy an equal number of shares at a new, lower price to return to the firm. If the price has dropped enough to offset transaction fees and the interest you paid on the borrowed shares, you may pocket a profit.


Because short selling is, in essence, the sale of stocks you don't own, there are strict margin requirements associated with this strategy, and you must set up a margin account to conduct these transactions. The margin money is used as collateral for the short sale, helping to ensure that the borrowed shares will be returned to the lender down the road.


Microcap securities, sometimes referred to as penny stocks, include low-priced securities issued by small companies with low market capitalization. These securities are primarily traded on the over-the-counter (OTC) market. While microcap companies can be real businesses developing or offering products or services, the microcap sector has a long history of bad actors engaging in price manipulation and other fraud. However, even in the absence of fraud, microcap stocks can present higher risks than the stock of larger companies. This is largely because relatively little information is available about microcap companies compared with larger companies that list their securities on national exchanges.


Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.


The risks of stock holdings can be offset in part by investing in a number of different stocks. Investing in other kinds of assets that are not stocks, such as bonds, is another way to offset some of the risks of owning stocks.


Stock funds are another way to buy stocks. These are a type of mutual fund that invests primarily in stocks. Depending on its investment objective and policies, a stock fund may concentrate on a particular type of stock, such as blue chips, large-cap value stocks, or mid-cap growth stocks. Stock funds are offered by investment companies and can be purchased directly from them or through a broker or adviser.


A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer.


Investors buy and sell stocks for a number of reasons including the potential to grow the value of their investment over time, to potentially profit from shorter-term stock price moves, or even to earn an income by investing in dividend-paying stocks. Keep in mind that the price of a stock can fall as easily as it can rise. Investing in stock offers no guarantee that you will make money, and many investors lose money instead.


Stocks are an important part of any portfolio because of their potential for growth and higher returns versus other investment products. In order to determine how much you should allocate to stocks, you should first develop a comprehensive financial plan that reflects your investment horizon and the level of risk you're willing to accept in exchange for the potential upside stocks can offer.


A ticker symbol is an arrangement of letters or characters that represent securities (stocks, mutual funds, etc.) that are publicly traded. When a company makes their securities available to the stock market, it establishes a unique ticker symbol. Then investors use the ticker symbol to place trades via an exchange like the New York Stock Exchange (NYSE) or the NASDAQ. Here are several ticker symbol examples: AMZN for amazon.com Inc., AAPL for Apple Inc., and IBM for International Business Machines Corporation (IBM).


Small-, mid- and large-cap stocks are ways to categorize market capitalization, which is the total value of all the shares of a company's stock. Very large companies like Apple and Alphabet (the holding company for Google) are considered large-cap stocks with market capitalizations starting at $10 billion. Stocks from relatively smaller companies are considered mid-cap or small-cap depending on how much all of the stocks they are issued are worth. Market capitalization for mid-cap stocks tends to be between $2 billion and $10 billion and for small-cap stocks between $300 million and $2 billion. As stock prices go up and down over time, market capitalization ranges and whether a stock is considered small-, mid- or large-cap changes over time as well. 041b061a72


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