How to Buy Stocks
You need to think that when you are buying stocks, you are effectively buying a small part of a company. Before the digital age to buy stocks, you would need to get a piece of advice from a stockbroker. Today things have changed significantly, and you can buy and sell stocks online very quickly with an online broker. Since there are lots of opportunities you might feel overwhelmed and here at TopTradingPlatforms.co.uk, we have decided to provide an excellent and easy guide on how to Buy Stocks.
1 – Set your Stocks Goals
Since you are going to invest money and time on this activity, it is essential that you spend time thinking about why you are considering investing in stocks. What do you want to achieve: do you want to build an emergency fund for the future, do you want to buy a home, investing for retirement?
- It is imperative that you write down your motivation: quantify in pounds and consider how much money you will need to reach for your goals.
Make sure you document your investment goals as this will clarify your thinking and will also help you focus on the trading goal.
2 – Determine your stocks buy time frame
Here you will need to determine for how long you will buy stocks and generally how long you will invest. The longer the investments can stay in place the higher are the possibility of success.
- If you are looking to buy a house in three years then your time frame or ‘investment horizon’ will be quite short. If you are investing to fund your retirement 30 years from now, then your investment horizon is much longer.
Determining how long you are willing for the investment to be in place is very important as you will buy stocks with a different strategy.
3 – Understand your stocks’ risk tolerance
Buying stocks do carry risks. Generally, all investments have risks, and there is always the possibility that you will lose some or all of your capital. Buy stocks is no different: you cannot go into this thinking that you are guaranteed a return as this is not the case. It is therefore critical that you are determining what is called ‘risk tolerance’.
- Before starting the online trading investment ask yourself how much money you are willing to lose if things will go wrong
- Since in most cases the more risk you take, the higher the return, you need to be firm in deciding how much you can effort to lose.
- You shouldn’t be losing sleep at night because of the investment pressure. If trying to achieve your goals is making your life more difficult, review your objectives as it is likely that they are not realistic enough.
4 – Calculate the investments needed to reach your goals
Since the investments results are linked with how much you are willing to invest, it is essential that you calculate the rate of return that you must earn and the investment that you need to reach your targets.
So let’s say you need £30,000 in three years but you can only invest £500 a month. In this case, you will need to earn a massive 38.2% on your investment each of the three years to reach this target. To have that rate you will need to accept a considerable amount of risk. A better strategy would be to lower the risk and extend your time horizon to 4 and a half years. In this case, you will require a much more achievable and safe return rate of 4.8%. Alternatively, you can also reduce the amount of money you are targeting to make.
5 – Choosing Investments and which stocks to buy
The next step is to decide which stocks to buy and generally which type of investment is appropriate for you. First of all, you need to understand what are the different types of investments that are available to you:
- Buy Stocks – you can buy shares of an individual company: this means that you are an owner of that company. If the company will increases in profitability so will yours returns if not the stocks you have bought will lose value.
- The market price of a company depends on how people feel about how the company will perform in the future. The price at which you buy and sell stocks will determine if you are going to make a profit
- Invest in mutual funds – Mutual funds are prepared to allow many people to invest together in many different stocks. In mutual funds, you have lower risks than buying stocks by yourself, but the returns will also be lower especially in the short run.
6 – Understand key terms
It is vital that you correctly understand financial news when buying stocks. Those will give you useful insights on the performance of different stocks and also on the market in general. To get the most from the financial news, you need to understand some key terms like:
- Earnings per share: this is the part of a company’s profits, and it is what is paid out to stockholders. If you are looking to earn dividends on your investment, this is a fundamental concept to understand.
- Market capitalisation (“market cap”): this is the total value of all a company’s shares. It is the company’s overall value.
- Return on equity: the amount of income a company generates about the amount invested by stockholders. This is an excellent value for companies in the same industry as it tells you which are the most profitable.
- Beta: This is a measure of a stock’s volatility, and it is relative to the overall market. It is an important metric to assess risk: a number below 1 means relatively low volatility while a number above 1 suggest high volatility.
- Moving average: this is the average price per share of some company measured over a specific period. It is a good indication to see if the current price of a stock is a good deal or not.
7 – Pay Attention to Analysts
Analyzing a stock before buying it can be confusing especially if you are a beginner. This is when it is suggested to ask advice from stock analysts. An analyst is a specialist and does watch specific companies closely to look at their performance.
- There are free, reputable websites where you can find good analysts’ opinions on companies.
- Analysts usually provide some useful advice in the form of one or two-word recommendations which are quite evident as those are: ‘buy’, ‘sell’ or ‘hold’.
8 – Determine your investing strategy
Once you have set up your investment budget and analysed the stocks you are interested in, it is time to plan your investing strategy. Every investor will have a slightly different approach, but there are some factors you want to consider:
- Diversity of investments – this is important as investing all your capital in a small number of companies can lead to a massive success if things are going well but can also mean you are going to lose all your money if things do not go as expected. The more you diversify the investments, the lower will be your risk.
- Compounding – this means keep re-investing any earnings you receive. If you do that you can generate more profits on those original dividends.
- Investing versus trading – Investing is a long-term strategy that aims at earning money based on long-term growth rates. Trading is a lot more active process, and it involves buying and selling stocks in the short term to get a small but frequent margin. Traders are looking to take advantage of people’s emotions about a company to get a profit it is in the short term. It is a potentially high rewarding thing to do, but it does also carry high risks especially for beginners.
9 – Buying Your First Stocks
Nowadays there are lots of ways to buy stocks. As you would expect, each comes with advantages and disadvantages.
Full-service brokerage firms – those are the most traditional ones and also the most expensive. Here you will have a broker that will guide you through the stock-buying process, and it will tailor the investment depending on your targets. Remember that you are going to pay hefty commissions every time you buy or sell a stock. If you buy for example £5,000 worth of Disney stock, your broker might charge a £150 commission to make the trade on your behalf.
Online brokers – if paying high commissions fee for your stock buying process is not what you want to do you should use an online broker. The main disadvantage of using an online broker is that you won’t get the same level of advice that you would from a full-service brokerage firm. Having said that online brokers are getting better and better, and now you can get some accounts with dedicated brokers that will guide you through the steps. The main advantage is that you will pay a lot less when transacting and you will also be able to buy your stocks online. Some most reputable online brokers are AvaTrade, ETX Capital, Markets.com.