Buying your first stock can be a rewarding and fun way to learn more about investing and find out whether it’s something you want to do more of. It’s the perfect way to dip your toe into the water of stock investing. So let’s talk about the steps you’ll need to take to become a stockholder.
If you’re considering buying your first stock, hopefully you’ve already cut your teeth on completing other personal finance tasks, like:
• Reducing debt: It can be good to get rid of all high-interest debt if you’re able, so you’re freed up to start investing.
• Building a safety net: Generally, everyone should build an emergency fund of at least three to six months of your salary, for the unexpected expenses that may come your way.
• Contributing to a retirement fund: That’s where many of us begin to learn about investing, usually in mutual funds through our 401(k) or IRA.
Once you’ve done all that, a next great step can be to start wading into the investing waters of stock trading.
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Step 1: Understand How Stocks Work
When you’re ready to settle on your first stock to buy, you’re really talking about buying a piece of a company.
You become a part-owner and might have certain rights, such as voting on a board of directors or other corporate matters.
You’re also share in the company’s performance, reflected in the stock price. When the company does well, you should be rewarded. When it’s in a funk, well, your stock will be too.
Stocks come in two general varieties:
Common stock. This is what people generally mean when they refer to stock trading. When you buy one or more shares, you become a common shareholder, which gives you certain voting rights, but these stocks may also offer dividends and potentially a gain in value, so one day, you can hopefully sell for a profit. Dividends might be declared by the company, say on a quarterly basis. It’s a way of distributing earnings and keeping shareholders happy. Common shareholders have little protection in a bankruptcy and liquidation of a company. In fact, you’d be last in line behind creditors and another class of stock. But don’t let that concern you too much. If you pick solid companies with good track records, you can attempt to minimize this risk.
Preferred stock. As the name implies, these stockholders get preferential treatment in the case of a corporate collapse. While they may or may not have voting rights, they are usually just behind creditors when it comes to getting back some of their original investment in liquidation.
Preferred shareholders also share more fully in a company’s profits because their dividends can be set in perpetuity. Corporations can cut dividends of common shareholders, but not preferred shareholders. However, companies can “call” their preferred stock, which means they can buy back your preferred shares according to the defined terms, but likely at a premium. So, not bad.
Step 2: Open an Online Brokerage Account
Gone are the days when you walked into a broker’s office and she placed a purchase order for your stock with the New York Stock Exchange—you know, the market pits where shouting traders haggled with each other to buy or sell stocks until the final bell rang.
Now, almost all of trading is done electronically, and for the average investor, from their laptop or mobile phone. With the arrival of online brokerage accounts, trading stocks became cheaper and much more hands-on for investors. Today, opening up an account is about as easy as opening a savings account on your bank’s website.
In choosing an online brokerage for picking your first stock to buy, don’t just select the one with the lowest trading fees. It may be worth paying a little more for great customer service or additional perks.
Some questions to ask yourself: How often do I intend to buy or sell stocks? How much support and additional educational services do I want? How much money do I want to spend? Typically, online trades will run you between $5 to $7, but fees have been falling over time and some online firms don’t charge any commissions to trade – like SoFi Invest®.
Win up to $1,000 in free
Step 3: Choose a Company and Research It
Buying your first stock inherently carries risk. How much depends on the specific company purchased and the volatility of the market. Some investors have their portfolios weighted across as many as 40-50 stocks to help create a diversified portfolio. When you have diversification, it can lower and level out the risk to some extent, so when one stock falls in price, others rising in price have the potential to balance it out.
So what should be your first stock to buy? One strategy could be to go with a company for which you have an affinity or with which you are pretty familiar. Think of the brands that are household names. If you’re buying just one share to try out stock trading, keep it simple and cheap.
Around $100 or $200 can be a good range to start with. Remember, this is for learning, first of all, so if you have a lot more money to invest, it may make good sense to chat with one of SoFi’s financial Planners before diving into the market on your own.
Once you have a few companies in mind, it’s time to find out more about them. Are they profitable? How do they perform against others in their industry? Has there been bad news recently on one or two of them? Here are some resources to discover more.
Company filings. The US government requires most companies to file financial data on their performance and notable changes in the corporation. Look for the company’s quarterly and annual balance sheet, income statement, and the cash-flow statement. It’s also a good idea to look at each company’s retained-earnings statement and its shareholders’ equity.
You can find these on the company’s website under the Investor Relations section, or you can go to the Securities and Exchange Commission website to find any required filing. You’ll need to get acquainted with financial ratios . They will help you contrast and compare different companies so you can make a final decision. You’ll find them invaluable for selecting your first stock to buy.
Market news sites. Plenty of sites devote pages and pages of content on what companies are doing, where sectors are heading, and how the market is reacting. Get in the habit of browsing a few every day. You can even set up alerts. That way, when you learn how to buy your first stock, you can keep up with all the news.
Almost all of the better sites have mobile apps, making it a snap to find out what’s going on. Some of the more widely respected financial news sources include MarketWatch, The Wall Street Journal, CNBC, and Bloomberg. But there are many more, so find the ones you enjoy reading.
Deep analysis sites. Many companies offer stock-market research and make the task of evaluating stocks easier. Some offer information at no cost, others charge a subscription. Zacks Stock Screener, Finviz.com and Seeking Alpha are examples of sites that do not charge. The sites that offer even deeper analysis, like Morningstar, may charge a fee. Many online brokerages also offer analysis content you can use.
Step 4: Consider Other Investments, Too
If you’re new to investing, and especially if you’ve never ventured beyond savings accounts, consider two other investment vehicles that can offer a bit more diversity: Exchange-traded funds (ETFs) and mutual funds.
Whether you’ve settled on buying your first stock or opted for one of these alternatives depends on your risk tolerance. These other options provide slightly less risky ways to invest than buying individual stocks, and have the potential to be just as rewarding.
Mutual funds. You’re probably already familiar with mutual funds. They’re diversified portfolios of individual stocks and are managed by an investment professional and may seek to track a certain market. They allow you to benefit from diversification, helping to lower your risk.
You can invest in mutual funds that mainly hold blue-chip companies, or ones that hold companies with high growth potential. You can even invest in index mutual funds, which hold stocks that mirror the major market indexes like the S&P 500 and the Dow Jones Industrial Average.
If you’re already enrolled in your company’s 401(k), you probably own shares in several mutual funds already. Many of these investments are appropriate for long-term investors, so they make sense in retirement accounts.
Unlike ETFs, however, mutual funds may not be as tax-efficient. In other words, every time a stock is sold for a gain within your mutual fund, it has the potential to create a tax liability. With ETFs, a potential tax liability is created when you sell the ETF and not often when individual stocks are sold for a profit within the fund.
ETFs. Exchange-traded funds have the diversification of a mutual fund with the convenience of stock trading. They essentially act like a basket of investments, whether that’s stocks, bonds, or commodities, and they trade on the open market, so their value fluctuates throughout the day. They offer a convenient way to own a portion of many stocks in one investment that can be traded easily on a market exchange.
Instead of managing a portfolio with hundreds of individuals stocks, many investors prefer the simplicity of owning a handful of diversified ETFs. Investors who want to invest in certain sectors also look to ETFs so they can own a broad spectrum of companies in one particular industry. In that scenario, they can be more effective than trying to pick the right stocks in a sector and hoping they match the overall industry’s performance.
Taking a First Step Before You Buy a Stock
When you’re ready to start choosing your first stock to buy, you’ll need an account from which to begin trading. Investors sometimes save up money to use for investments in an interest-bearing checking or savings account.
That allows your parked funds to continue to grow while you wait for your next stock-buying opportunity. Similarly, a money-market account, which reinvests dividends from money-market funds, can be a good way to hold your money. Both are highly liquid, which means fast access to your money.
Another option is a wealth management account, where you can combine several accounts into one and even get access to certain investment vehicles, such as ETFs. A SoFi Invest account also offers complimentary access to financial advisors when you become a SoFi member. Plus, SoFi’s automated investment account automatically balances your investments for you, so you don’t have to do all the heavy lifting.
Going from “how to buy my first stock,” to “there are so many great stocks to choose from,” means a lot of good learning has transpired. And you’ll soon find out that stock trading and investing can be a rewarding way to learn about companies and business while (hopefully) growing your savings. Take your time, keep on learning, and you’ll likely be set for many years of investing enjoyment.
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