Picking stocks is a lot like buying a car. When you buy a car, you can’t just go with the first one that’s the right color – you need to know about it. You want to check under the hood, or at least kick the tires. If you don’t know about cars, you bring along your brother or your dad or someone who does. Most importantly, you take your time. If you’re not sure about the mileage or the sound from the exhaust you pass it up and wait for a better deal. It’s no different when you pick stocks.
The first thing you need before you buy shares in a company is a stock trading account. For this, you need a broker. If it’s your first time, I recommend using a discount broker. This type of broker will process your buy and sell orders, and little else. Where do you go to find a stock broker? Try your bank. There might be other less expensive options, but your bank is a place you feel comfortable, and you know how it works. Chances are if you have an account there they can help you start a share trading account easily and at a low cost. I trade shares using online banking.
For your first purchase, you want to buy what you know. Look at 3 companies that you like – companies you have bought things from or know people at. Pick up a newspaper and write these four things down:
- Price– If the shares are $500 a piece, you might want to skip this one for now.
- Year’s Move (YM)
- Dividend Yield (DY)
- Price/Earnings (PE)
– This is how much the share grew in value last year, and a fairly good indication of what the company will try to beat this year.
– This is a percentage of the value of each share that the company pays to shareholders each year. Some shares don’t pay dividends, but make up for it with more growth (if the company doesn’t pay shareholders it can spend that money making the company more valuable).
– This is simply the price of the share divided by how much the company made in this financial year. This figure can be misleading depending on current phase of the financial year, but basically a low Price/Earnings ratio means that the company’s stock is valued about right for how much money the company is making.
Either that or the share is undervalued and could go through the roof any day now. If the ratio is high it means that the company has a lot of projected growth, but little actual profits so far. This was common during the “internet bubble” when companies had huge prospects but hadn’t made any money yet.
Once you have these, it’s time to look at some graphs. Go to the company’s website, and click on “Investor Relations”. Download everything, and look at graphs of their share price and dividend payouts for the last year, 3 years and 5 years.Now read the newspaper. Not the front page, the boring bits at the back about money. Most of these articles are fairly easy to read, and reading them for a few weeks will give you a pretty good idea of what’s going on in the world of high finance.
Picking stocks is about more than knowing the company. It’s about knowing what’s going on in the world that will affect the company. Now it’s time to decide on your goals and make a buy case. First, write what you want out of your investment. Do you want to build capital over 10 years, or do you want to double your money in a year, but with the risk of losing half of it? If you are the former, then you are a growth investor. Otherwise you are a value investor. You might be somewhere in between, but since this is a first purchase it would be a good exercise to pick stocks according to a strict investment philosophy.
Now your buy case: This is an argument for and against buying the shares. In it you need to write:
- What’s going on in the company with regards to new business, new directors, new enterprises, new debt, new acquisitions/sales of subsidiaries etc.
- What’s happening in the world that could affect the company’s ability to make money
- The worst thing you can imagine happening. Think of the one thing that would make your company’s stock plummet more than anything else.
- As many pessimistic ideas as you can think of for why you should not buy these shares
- Why you think it is a good time to buy shares in this company now
Lastly, before you buy shares, ask people. Ask someone who works for the company or ask an investment advisor, even if you have to pay them. If there is even one factor that you have not considered, your entire share trading experience could be very painful.
Remember, buying shares is not gambling if you know the rules. Understand your risks, and don’t take any you cannot afford to make. Avoid startups for a first investment – save the riskier stocks for when you are more confident.