One of the most time tested methods of building and growing wealth is with stock investments. When we invest in a stock, we are buying a piece of a company, the value of which rises and falls with market demand. While stock market returns can vary greatly from year-to-year, stock market returns have averaged 10 percent a year over the long-term. And when we add to our initial investment by buying more stocks over time, the returns can truly be substantial.
Buying stock starts with:
- Educating yourself
- Identifying your goals
- Researching your options
- Selecting a brokerage
Stock market investing is not as simple as buying a banking product, like a certificate of deposit. A banking product typically provides a guaranteed return if you buy it and hold it for a certain period of time. However, when you buy a stock for a period, there’s no guarantee that its value will have increased. In fact, you may lose some — or even, in extreme cases, all of your money. It’s therefore, important to know what you’re doing before you invest a dime.
There are a number of terms you should know, terms such as:
- Brokerage firm: a company that buys, holds, and sells securities on behalf of its clients
- Commission: the price you pay a broker to buy or sell a share of stock
- Dividend: a reward paid to stockholders out of the company’s profits
- Portfolio: a group of stocks, and/or other securities held or managed by an individual or an institution
- Security: a financial asset that one can buy or sell, such as a stock, bond, or mutual fund
These are just a few of the terms you’ll start to learn, as you begin to read more about stocks and investing. Read as much business news as you can on sites like AfroTech, and consider subscribing to a personal finance magazine, like Black Enterprise, to begin to absorb the vocabulary you’ll need to know.
Identify Your Goals
It’s critical to start to identify your financial goals and how investing can help you achieve them. Your goals might include short-term goals like saving for a house, mid-term goals like saving for your newborn’s college fund, or long-term goals like saving for retirement. Determining your goals and how much money you want to invest upfront and over time will help you figure out what investment options make the most sense for you.
You also want to start to assess what kind of investor you are. Riskier investments may yield greater returns over time, but on a day-to-day basis, stock values may vary significantly over time. Some people are very uncomfortable watching their investments lose substantial value even if they have no intention or need to sell their securities any time soon. Many others are not. Your comfort level with risk — also known as your risk tolerance — will play a role in the investment choices you make.
Research Your Options
Before you make a purchase, consider first whether you have enough of a risk tolerance to buy individual stocks. For those who are not comfortable buying a few securities, mutual fund or ETF investing can also offer an excellent way to invest in stocks while mitigating risk. A mutual fund is a type of security comprised of a bundle of different stocks (and possibly other securities, such as bonds). Typically, you buy and hold mutual funds until they’ve appreciated enough in value to meet your mid-term and long-term financial goals. An Exchange Traded Fund is a bundle of securities that is priced and trades like a stock, allowing you to buy and sell them quickly, as necessary.
Regardless of whether you buy equity mutual funds, ETFs, or individual stocks, you should familiarize yourself with your options in each of these categories. When considering ETFs and mutual funds, you’ll want to take a look at what industries the stocks they hold are invested in. You’ll want to do your own research about the outlook for those industries to assess whether you think the ETF or mutual fund will increase enough in value over time to meet your financial goals.
When assessing stocks, you’ll want to review how well the company itself is performing. There are many indicators of a company’s health, such as its sales revenue, its net profit, and its debt-load. Certain external factors should also be considered. For example, if a natural disaster has depressed beef supplies worldwide, then buying shares of a fast-food company would probably not be a good idea if you’re investing for a short-term goal.
Identify a Broker
While a few companies allow you to buy stocks directly from them, the easiest way for beginning investors is to buy stocks through a broker. There are several types of brokers to choose from, including deep discount brokers, discount brokers, and full-service brokers. Deep discount brokers typically allow investors to purchase stocks online for low commission fees. Discount brokers, which charge a higher commission, also provide investors with additional resources, including access to investment research reports, investment advisors, and different types of brokerage accounts. For an even higher commission charge, full-service brokerages usually offer investors the broadest range of investing resources, including portfolio management services for investors who commit to investing specific minimum amounts.
So which broker should you choose? Well, you should consider several factors beyond just the cost of buying and selling a stock. If you feel comfortable teaching yourself about investing and would rather more of your money be spent on the stocks themselves, consider a deep discount broker or a discount broker. If you’d prefer hands-on support and guidance, a discount or full-service broker may be your best bet. Many personal finance magazines, such as Black Enterprise, can provide insights about which brokerages are good options. You can also check with your bank to see if they offer brokerage accounts, as many do nowadays.
When you’ve selected your brokerage firm and opened an account, you’re ready to buy stocks. Here are a few tips to make sure you’re investing properly.
- Make sure you’re buying stocks aligned with your investment strategy, rather than tips you see periodically online or hear from friends and family. Base your purchases on the research you do. Keep current with news developments about the companies in which you own stock and make your decisions based on your assessment of each company’s financial health and projected growth.
- Research the tax implications of selling your stocks, before you sell them. The more you invest, the more you should consider hiring an accountant or tax attorney to help you understand your potential tax liability.
- Keep a separate cash cushion for emergencies. You want to avoid cashing out your portfolio in case of emergencies, which can trigger unwanted tax consequences.
- If you’re investing for the long-term, avoid buying and selling stocks based on daily fluctuations. This is known as timing the market. Doing so is extremely difficult, even for professional money managers. Excessive buying and selling also can result in significant tax liabilities.