Chapter three: How to buy stocks?
Before you jump in to buy one share of stock or multiple stocks, you need to have a goal you want to reach. Are you investing for retirement? Do you want to buy stocks because you think you can make money fast, or perhaps you want to get your feet wet and just gain some experience? Answering the thoughtful question, what your goal is, will determine what type of investor you will be, how much money you will need, and how long you should hold on to the stocks you are planning on buying. Answering this question will also determine if you are a short-term or long-term investor.
Short-term investors like to buy and sell frequently within the same day, or within a couple of weeks. These traders are called day traders and swing traders. These traders try to make money fast by buying low and selling high, or short selling. They are in their trading accounts every single day the stock market is open, looking for opportunities to make a profit. Long-term investors take a different approach. They still keep an eye on how their stocks are performing, but they take the long-term approach of buying stocks to hold for five, 10, or many more years. If you invest for retirement, you would take the long-term approach.
You should also ask yourself how much risk you are willing to take on if you buy stocks. The stock market can be very volatile, and you could lose a ton of money if you are not careful. If you are a young investor who has some money to play around with, and don't mind the short-term up and downswings on the market, then you can take on a good deal of risk, but if you are close to retirement and want to preserve and grow your money, then you should be more cautious about investing and buying stocks. It's also a good idea to talk to a financial advisor or a financial planner.
In order to start investing, you need an investment account. This account gives you access to buy and sell equities, also called stocks. There are many types of accounts on the market, but the more prominent ones are the 401(k), IRA, Roth IRA, traditional brokerage account, the 403(b), and the education savings account, also called ESA. The 401(k) and 403(b) are available only through your employer, if they decide to enroll in these accounts. Companies also offer a certain match percentage, or dollar amount, in order to motivate their employees to participate in the plans. There is a limit, however, to how much you can contribute to a 401(k) or 403(b). The IRA, which stands for individual retirement account, and the Roth IRA, are both retirement accounts you can set up with an investment firm, bank, or credit union. Three differences between the IRA and 401(k) are the limit amounts, company match, and selection of investment options. IRAs and Roth IRAs always have a lower limit compared to the 401(k). IRAs also do not offer a company contribution match. Where IRAs and Roth IRAs do stand out is in allowing you to invest in whatever you like. Investing through a 401(k) is always limited by what the company has chosen for their employees, which are target date retirement funds, a limited selection of mutual funds and index funds, and no individual stocks to select from, unless the company allows you to purchase some of its own stock. Also, you don't have to choose between setting up a 401(k) or IRA, because you are allowed to have both. 401(k) and IRAs penalize you if you withdraw your money before you are 59 and a half. You get hit with a 10% penalty, and you are more than likely also gonna pay taxes. This is where the traditional brokerage accounts step in.
The brokerage account allows you to withdraw your money any time, but you will, however, pay taxes on your capital gains and dividends, but you won't get hit with a 10% penalty. With all the different types of accounts on the market, it might be hard to choose one to get started, so let me tell you what I've done. First, I enrolled in a 401(k) and got my company match. I then opened a Roth IRA with a discount broker, and then I opened a traditional brokerage account. Don't forget, you are not limited by the amount of investment accounts you can have.
Some of the top brokerage firms are Ally, E-Trade, TD Ameritrade. Opening an account is also really easy. Just head over to the investment website and click on the open account button, or you can also call them, and they will eagerly help you in opening your account. In order to buy stocks, you need to know the ticker symbol of the company you want to buy stock in. The ticker symbol is the unique abbreviation of the company on the stock market. For example, The Pepsi Company is found under the ticker symbol PEP, Amazon is AMZN, and Walt Disney is DIS. Once you know the ticker symbol, you are ready to find out what the price of a share is, and how many you want to buy. Head over to your brokerage account, and log in. Navigate to your trading option, and type in the amount of shares you want to buy. In my example below, we are looking to buy five Coca-Cola stocks. Now, you have to choose your order type. Let's go ahead and choose the market order, which means we'll buy the stock at whatever price it is on a market currently. You then preview your order, where you can see what you're buying, how many shares, what your commission is, meaning your trading fee, and your order total. Hit place order, and if you're trading during the regular hours, which is Monday through Friday, 9:30 a.m. Eastern Time, your order will execute immediately, and your trading account will update with the stocks you just bought. So this is a fairly easy process. However, the important thing is to buy stocks at the right time, by looking at both the technical and fundamental analysis of a company.
