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How to Buy StocksThree Parts: Learning About The Stock Market Researching A Stock Purchase Making Your Investment

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When you buy stock, you are purchasing ownership in the company thatissues the security. As an owner, you have certain rights. For example, a stockinvestor has the right to receive a dividend if the company generates sufficientearnings. Investors also have the potential to sell their shares of stock for again. You can buy individual shares of stock, or purchase a stock mutual fund.

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Consider how the stock market works. The stock market works like any othermarketplace. In this case, the products being bought and sold are pieces of

ownership in companies. We call these shares of stock. Stocks are traded onexchanges. You can think of an exchange as the marketplace. In the U.S., the majorexchanges include the New York Stock Exchange and the National Association ofSecurities Dealers Automated Quotation system (the NASDAQ).[1]

Stock prices move up and down depending on supply and demand. When thereis a large demand for a stock, its price will rise. Since there are more interestedbuyers than sellers, the stock price will increase. When there are more sellersthan buyers, the price will fall.A stock's price is a reflection of the investment community’s opinion of thestock. The price is not necessarily the actual value of the company. This meansthat short­term prices are often affected by people's emotions, rather than byfacts. Prices can move based on information, misinformation, and rumor.Your goal as a stock investor is to purchase shares of a company that willincrease in value over time. If the issuing company grows their sales andincreases profits, investors may buy more of the stock. If the stock price goesup, you can sell your shares for a gain.For example, imagine that you buy 100 shares of stock priced at $15 each.That's a $1,500 investment. After two years, the stock price increases to $20.Now, your investment is worth $2,000. If you sell your shares, you’ll recognize a$500 gain before any fees or commissions ($2,000 ­ $1,500).

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Go over the terminology related to stock trading. These terms help you decide

Part 1 of 3: Learning About The Stock Market

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2 exactly what type of buy or sell order you want to place with your broker. The termsallow you place certain conditions on your order to buy or sell stock.[2]

The ask price, also known as the offer, is the lowest available price when tryingto buy shares of a stock. Assume you want to buy IBM common stock. If thecurrent ask price is $50 per share, you would pay the $50 price for the stock.The bid price (or simply bid) is the highest available price you can find whentrying to sell shares of a stock. If you own IBM common stock and want to sell itnow, you would receive the bid price per share. If the bid price is $49.75, youwould receive that price per share.A market order is a request to buy or sell a security immediately at the bestprice available. If you place a market order, you will pay the ask price as abuyer. If you are selling, the market price you receive will be the current bidprice. Keep in mind that your order could be executed at a price higher or lowerthan what you're hoping for. The immediate execution of a market order isguaranteed but the price is not.In addition to a market order, you can place orders that put conditions on yourbuy or sell price. A limit order, for example, is a request to buy or sell a securityat a specific price or better. On the other hand, a stop order is an order thatbecomes a market order once a certain price is reached. Consult with a brokerwho is licensed to trade securities. Ask the broker if these other types of ordersare right for you.

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Look into buying a mutual fund. A mutual fund is pool the money provided bymany investors. The pool can be used to buy a variety of investments. You can

select a mutual fund that invests in the stocks of many different companies. When youinvest through a mutual fund, you get a stake in every stock the fund invests in. This canbe a lower­risk alternative to buying stocks individually.[3]

Investing in mutual funds can lower your investment risk because ofdiversification. If you invest in one stock, your risk is concentrated in onecompany. A mutual fund, on the other hand, may hold dozens (even hundreds)of stocks. If the value of one stock declines, it will have little effect on the overallvalue of your investment.If you’re just starting out as an investor, this can be a good way to invest instocks. Choose a mutual fund if you feel uncertain about investing in stocksindividually, or if you don't have sufficient time to research and manage aportfolio.Be aware of mutual fund fees. Keep in mind that you will pay fees forprofessional money management in a mutual fund. For example, you may pay asales charge when you buy or sell your fund. Fund investors will also pay anannual fee for the money management and operation of the fund. These annualfees are based on a percentage of the assets under management.Say, for example, that you have $10,000 invested in a stock mutual fund. If theannual fee is 1/2 of 1% of the assets, you annual fee will be $50.

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Part 2 of 3: Researching A Stock Purchase

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1 Learn about investment research. If you decide to purchase individual stocksinstead of a mutual fund, it is important to do some research. There is a huge

amount of available data on the Internet. Finding useful data can be difficult. There aresome useful tools you can use to perform analysis and select a stock.[4]

Information about stocks is typically found on a company's website or in theirannual report. These resources can provide valuable information about acompany's business model and financial results. In addition, companiesfrequently prepare investor presentations. These presentations are oftenprovided in an easy­to­understand format. Review these documents beforemaking an investment decision.Websites like Morningstar.com are also useful. New investors may findquarterly or annual reports overwhelming. By researching a stock onMorningstar, you can access essential information on a company, such as thebalance sheet, income statement, and statement of cash flows. Morningstaralso provides important financial ratios, which help in analyzing the company.This website is easy to navigate and review.Perform a Google search for news about the company. Read the recent newsarticles that explain how the company is performing. A news source should bean independent third party, so the information should not be biased.

2 Search for companies of interest. The first step is to find a company to research.To do this, read investing publications and websites, like the Wall Street Journal or

Investor's Business Daily. Similarly, websites like Stockchase.com can provide ideas forstocks that analysts rank highly.[5]

Start by investing in blue chip stocks. Blue chip stocks are large, well­established companies with a track record of generating profits. These firms aretypically recognizable corporate names. They make products and services thatconsumers know and purchase. These stocks are more likely to grow steadily inprice over the long­term.While these companies do present some risk to the investor, they are often lessvolatile than other companies. Blue chips tend to have a large market share inthe markets they operate. These firms are well funded, and may enjoy somecompetitive advantage.Blue chip stocks include Wal­Mart, Google, Apple, and McDonald's, amongmany others. Think about companies that you turn to for products and services.

3 Choose a business that performs well. Once you find a good candidate, youshould review some key financial indicators for the company. Compare those

indicators with the firm’s competitors to see how they compare. A few specific indicatorsare widely used to assess the investment value of a company.[6]

Look at the company's profit margin. Profit margin is defined as (net income)/(sales). For this discussion, net income and profit mean the same thing. Thisindicator explains how much profit a firm generates for every dollar in sales. Abusiness always wants a higher profit margin. If a firm earned 10 cents on everydollar sold, for example, the profit margin would be (.10)/ ($1), or 10%.Analyze the company's return on equity. Equity refers to the total dollarsinvested by all company stockholders. Return on equity shows how well acompany is using its shareholders' money to generate a profit. The ratio isstated as (profit) / (shareholder equity). If a firm earned $100,000 profit on$2,000,000 in equity, the return on equity would be ($100,000)/($2,000,000), or5%.

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Look at a company's past and expected growth. Is the company steadilygrowing earnings per share? This is a sign of a strong business that likely has acompetitive advantage of some sort.Compare the firm’s historic rate of earnings growth to its peers. Also, look at theprojected earnings growth rate for the next five years. If it is higher than itspeers, that’s an indication that the stock price may increase.Look at the company's debt. A well­managed company should not take on moredebt than it can afford to repay. One popular way to analyze debt is using thedebt­to­equity ratio.The debt­to­equity ratio takes the company's debt and divides it by shareholderequity. The lower the percentage is, the better. If a firm has $2,000,000 in debtand $4,000,000 in equity, the debt­to­equity ratio would be($2,000,000)/($4,000,000), or 50%. Compare the ratio to the firm’s competitors.

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Familiarize yourself with the concept of value. You can think of a stock as amachine that is designed to generate profits. If the machine performs well and is

able to generate more profit, investors view the machine as more valuable. The mostimportant financial ratios for a stock’s value relate to earnings.[7]

The common way to value a stock is to use the price­to­earnings (P/E) ratio.The P/E ratio takes a company's current share price and divides it by the annualearnings (profits) per share of stock. This is an important tool to evaluate thevalue of an investment.Earnings per share represents the total earnings in dollars divided by thenumber of shares held by the investing public. Shares held by investors arereferred to as outstanding shares. If, for example, a company earns $1,000,000per year and has 10,000,000 shares outstanding, the earnings per share is($1,000,000) / (10,000,000 shares), or 10 cents per share.Assume that a company’s stock is trading at $50 per share. If the earnings­per­share total $5, the stock’s P/E ratio is ($50/$5), or 10. If an investor bought thisparticular stock, they would be “paying 10 times earnings”.If Company A is trading at ten times earnings (or a P/E of 10), and Company Bis trading at a P/E of 8, Company A is more expensive. Note that "moreexpensive" has nothing to do with the share price. Instead, the multiple is areflection of how expensive the share price is relative to earnings.

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1 Investigate the possibility of buying stock directly from the issuer. Somecompanies offer direct stock purchase plans (DSPPs) that allow you to purchase

stock without using a broker. If you are planning to buy a small amount of a certainstock, this may be your best option. This approach saves you the time and cost of goingthrough a broker.[8]

Search online or call the company whose stock you wish to buy. Ask them ifthey offer a stock purchase plan. If they do, the firm will forward you a copy oftheir plan's prospectus, application forms, and other relevant information. A

Part 3 of 3: Making Your Investment

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prospectus is a regulatory document that discloses all of the importantinformation about a stock purchase.Many plans allow you to invest as little as $50 per month. Verify any fees youneed to pay. A few companies offer no­fee investment plans.DSPPs also allow you to reinvest all your dividends automatically if you desire.Dividends are paid to you based on the profits of the company. The company’sboard of directors must declare a dividend in order for a payment to take place.

2 Choose a broker. If you can't buy the stock you want directly from the issuingcompany, you'll need to find a broker. Brokerage houses vary in terms of the

services they provide. This means you'll need to compare your options and choose thebrokerage that suits you best. Generally speaking, there are two types of brokers: full­service and discount.[9]

Full­service brokers are more expensive. These firms target their servicestoward investors interested in receiving recommendations and guidance. Thehigher fee may be worthwhile, however, because full­service brokers canprovide valuable assistance. If you’re not confident in your ability to pick stocks,or if you don’t have time, consider working with a full­service broker.If you plan to make your own investment decisions, choose a discount broker.There is no point in paying a higher fee for services you aren't going to use.Still, you must examine each broker's platform closely to make sure theirofferings align with your investment objectives.Search the Internet for online discount brokers. Analyze the fees, particularlyany additional charges that may not be mentioned when you first contact aprospective broker. Ask for a written disclosure of all fees charged.

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Open a brokerage account and deposit funds. Contact a broker about openingan account. Your broker will have you fill out a new account form. This form

documents your personal information, along with your investment experience and yourrisk tolerance.[10]

Your broker must report your stock trades to the IRS. Specifically, salesproceeds from a stock sale, along with dividend income, are reported to theIRS. You will need to fill out the required forms and send them back to thebroker.Determine how to deposit funds into your brokerage account. Send your brokeran initial deposit of money that will be used to make your first stock purchase.Enter an order. Notify your broker of the company's stock you want to buy andthe number of shares. When your trade is completed, you will receive aconfirmation. The confirmation is your record of the purchase. Keep all of yourconfirmations on file.

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When is the best time to buy, hold, or sell a stock?There are a thousand factors here. As a novice, look for investment advicesources you trust while you expand your knowledge. A detailed look at theyear­by­year performance and reports of the company is a good place tostart learning.

What is the actual process for purchasing shares?Almost all stocks are purchased through a stockbroker. This can rangefrom an online broker that follows your instructions, to a personal financialplanner who meets in person to plan your investment. The first option ischeap; the second option is more effective.

How do I buy shares online? Are there associated risks?Search for an "online broker." This service will handle the transaction, butoffer little to no advice. This can be risky if you don't have any stockexperience, but as long as you read the terms carefully you can avoidproblems with the broker itself.

People talk about buying stocks, equity, or mutual funds. What'sthe difference?An equity is a general term for ownership in a company, so "shares ofstock" and "equity shares" are the same thing. A mutual fund is a collectionof shares you can invest in with one purchase, which is a lower­risk tacticthan betting your money on one company.

How do I invest in an exchange­traded fund?Just like shares, most ETFs are purchased through a stockbroker.Although diversified, they are riskier than mutual funds, and themanagement fees can make them unprofitable for a small investor.

How do I find the unit cost of a company's product?The unit cost, or amount the company spends to sell one unit of product,may be listed in the company's quarterly report. A company that sellsproducts with a low fixed cost can reduce the unit cost as it grows througheconomies of scale.

How do I look up a share price?A quick online search for "stock prices" will lead you to many free stocklookup databases.

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1. ↑ http://www.howthemarketworks.com/2. ↑ http://www.aaii.com/journal/article/how­your­buy­and­sell­orders­get­

filled.touch3. ↑ http://investor.gov/investing­basics/investment­products/mutual­funds4. ↑ http://www.investopedia.com/ask/answers/05/062305.asp5. ↑ http://www.quintcareers.com/researching_companies_guide.html6. ↑ http://faculty.philau.edu/lermackh/financial_analysis.htm7. ↑ http://www.dummies.com/how­to/content/cost­accounting­for­

dummies­cheat­sheet.html8. ↑ http://www.forbes.com/sites/moneybuilder/2012/06/20/how­to­invest­

using­direct­stock­purchase­plans/9. ↑ http://guides.wsj.com/personal­finance/investing/how­to­buy­a­

mutual­fund/10. ↑ http://www.finra.org/investors/what­expect­when­you­open­

brokerage­account

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