How to Buy Stocks
Individual stocks or equities are an advanced way to build wealth. Most investors begin with a mutual fund in a retirement plan at work, or by contributing to an individual retirement account (IRA). Mutual funds are generally made up of individual holdings in stocks and/or bonds. These funds are usually managed by professional money managers who select how much of a stock or bond the investor should hold in the fund. These options are often a solid basis for beginners and less experienced investors as they take the guesswork out of investing.
Over the past 25 years in the investing world, I have witnessed that the largest and wealthiest investors generally are those that have built an individual stock portfolio over time. These portfolios do require more attention if you are managing them yourself. Before jumping into stock investing, one needs to consider several different factors:
AM I INVESTING OR AM I TRADING?
Short-term trading or “day trading” generally is not considered investing. When one engages in short term trading, they take a larger risk by using the stock market as a casino. There are 100 or more different strategies for day trading. All one needs to do it search the internet for day trading and there will be plenty of individuals or marketing companies hoping to sell you a daily trades list or newsletter to get in on the next “hot tip.” This is an easy way for the novice stock investor to get in over their head gambling and losing their money instead of investing.
The safer and more proven method of investing in stocks is to use the “buy and hold” strategy. Buying companies that have a long-term history of supplying regular, predictable returns is a much-preferred way to buy equities.
ARE YOU READY TO START INVESTING?
MEMBERS Financial Services can help.
HOW DO I PICK WHAT TO INVEST IN?
Let’s start by looking at your average day. You wake up with your alarm going off on your phone. Since you are already on the third snooze, you hop out of bed, brush your teeth, take a shower and get ready for work. You get in the car, drive through and get coffee, and make it to work on time. You read some news on the internet, make a couple quick posts on social media and then settle into some computer data entry and processing for the morning.
Now, let’s REWIND: You used your phone, toothpaste, soap, shampoo, make-up, coffee, car, tires, gasoline (or electricity), internet, Facebook or Instagram, computer, software and office equipment. All of these are things that you and several million people use per day. Companies that make and sell these “essentials” are great companies to invest in.
Think about companies that you like and trust and want to support and chances are you can invest in them if their shares are traded securities.
HOW DO I KNOW WHEN TO BUY?
I don’t know about you, but I prefer to buy things when they are on sale or marked down. Think of buying stocks the same way. If you stick to brand names, and look for value in a price pullback, then chances are you can get some good deals. My best example of this is back in 2001 when the stock market dot-com bubble burst. The whole market pulled back over 30%. That’s a SALE! I bought Home Depot and Visa stock. Home Depot was $30 per share and Visa was $20 per share. Today, 20 years later Home Depot is $334 per share and Visa is $226 per share. That’s 11 times the original cost. And I have only sold small pieces of them over the years. Why have I held on to them? I believe in buy and hold and building wealth one stock at a time.
Make a list of the companies you want to buy and wait for the right time to buy them. This is where patience and having a plan can pay off over the long haul.
WHAT DATA SHOULD I STUDY?
There is a plethora of information available to study. There are many charting theories and data points when you are first starting. A free stock quote page like Google Finance or Yahoo Finance is helpful when looking at the data. Here are a few basic things to look for.
EARNINGS PER SHARE (EPS):
Does the company make a profit? It will be expressed as a number in EPS. If not, you may be looking at a riskier stock. Some companies take years before they finally make a profit, e.g., Amazon. If the EPS number is negative, “0,” or “N/A” this company may not be ready for primetime.
The trading range indicates the difference between the stock’s high and low trading prices and is expressed as a “day” and a “52-week range.” The range for any stock will narrow and broaden throughout the year and the 52-week view will allow you to see the ups and downs of your particular stock and determine how volatile the stock is. If you want to buy the stock, it’s best to wait for the range to narrow and buy near the bottom of the range.
Every three months, public companies release an earnings report, which summarizes their profit or loss for the past quarter. The report often indicates what the company thinks will happen in the next quarter. There is typically a lot of trading activity the week leading up to the release. Generally speaking, if the report is positive, the stock price tends to rise and if it is a disappointing report, the stock price falls. Which again, could create an opportunity to buy if it seems like a short-term problem. Knowing when a company releases its report and how to read it can give you a sense of what to expect near that period.
It is important to know what the trading volume is for a company you are considering buying. You need to know that there is enough volume if you should want to sell shares. If there are not enough buyers for your shares, you may get stuck holding them longer than you intended. Look for “Avg. Volume” to be in the millions of shares. That will assure you that there will be a buyer when you are ready or have to sell.
A good way to build a portfolio is with dividend reinvestment. Many traditional companies will pay shareholders a cash dividend each quarter. You can take the cash or reinvest the cash back into the company stock. Let’s say you buy 10 shares of AT&T stock (T). The initial cost is $27 per share or $270. AT&T’s dividend is currently 52 cents per share each quarter. That means you will get $5.20 each quarter in cash. Now, let’s reinvest that and see the real value. After five quarters (15 months) you will have earned nearly enough in dividends (5 x $5.20 = $26) to have purchased another share and it is basically for free. Quarter after quarter you can grow your portfolio in this way.
Investing in individual stocks may not be for everyone. It takes some dedication to educate yourself about the different options and make an educated decision. The good news is that you don’t have to engage in this activity on your own. You can request the support of your financial advisor. With some time and effort, you can develop a portfolio that reflects your interests, values, and goals—this can be an extremely rewarding experience.
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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.
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