What To Know Before You Begin Investing In Stocks

Eager to get started, many people begin investing in stocks before they really understand the basics of investing. While it there are some things that can only be learned from experience, jumping in too hastily can be a big mistake. Here are some things that you should know before you begin investing.

What is the stock market?

The stock market is the general term for a collection of stock exchanges that allow investors to trade securities.  There are a number of stock exchanges around the world, including the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, Tokyo Stock Exchange, and Euronext.

Why does a company issue stock?

A company issues stock to raise funds in a way that doesn’t require them to issue debt.  In exchange, shareholders get a piece of ownership of the company, and are entitled to dividends that the company decides to pay out.  In addition, if a publicly traded company is acquired or purchased by another company, shareholders of the company being acquired are compensated in the form of cash or stock in the acquiring company.

How do you buy a stock?

Investors can buy or sell stocks on any one of a number of online brokers, or using a full-service stock broker.   Brokers actually buy and sell stocks for investors.  Cost per trade varies greatly depending on what type of broker you use.  Online brokers charge anywhere from around $5 to $20 per trade, while trading with full-service brokers can cost much more.

Are you an investor or a trader?

In order to identify stocks you are interested in, it is first advisable to decide on a basic investment strategy to use.  First, decide if you are an investor or a trader.

Traders are typically less concerned with financials and fundamentals and more concerned with the short-term movement of stock prices.

Investors are typically concerned with the long term potential of a company.  They do things like looking at financial statements, reading annual reports, and studying management.  Investors typically think that if you choose to buy stock in quality companies, profits will eventually follow as the companies grow.

What is your investing style?

Once you decide that you are an investor and not a trader, you can also choose your investing style.  There are two predominant investing styles that people commonly refer to: growth and value.  Value investors are like bargain shoppers.  They look for a quality company whose stock is temporarily priced low.  Growth investors look for companies whose revenues or earnings are growing at an increasing rate.  Many people look for elements of both growth and value.

Coming up with an exact strategy to pick stocks is one of the most difficult things about investing.  But if you develop some basic guidelines for yourself, it will help you stay on track.

Where can you get information about stocks online?

Once you figure out what type of investor you are, you will need to know how to get access to the information you need.  There are many sites that provide free information, including Yahoo! Finance, Google Finance, MSN Money, and many more.  Get to know how to navigate one or several of these sites.

Once you know how to get access to information, you will need to be able to understand the information in order to be able to adequately make use of it.  You will need to learn how to do things like read financial statements, calculate and interpret financial ratios, what to look for in annual reports, what to listen for in conference calls, and how to analyze management.  There are plenty of books and online resources that can help you learn all of this.

Getting Started

Before you commit any real money, you might want to start a practice portfolio to get used to how the market oscillates.  Once you are comfortable and think you can mentally withstand the ups and downs of the market, create an account at an online broker.  Start by investing a small amount of money and then work your way up.  Make sure to keep your portfolio relatively small (5-10 stocks) so you can stay on top of your stocks by doing frequent homework.

This should help you to get started.  Keep in mind that there is no easy or fast way to learn how to invest.  In order to really begin to understand how to invest successfully, you will need to invest some of your time in reading investing-related books and articles, and studying the habits of successful investors.

On the other hand, it is also important to keep in mind that becoming a successful investor is an ongoing process.  There is no way to learn everything before you start, and you will gradually get better as you gain experience.  So go ahead and get started now.  Maybe you can become the next Warren Buffett.