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How To Begin Buying Stocks
If you're one of those people who've always been fascinated by the stock market and its working, but have not been able to figure out how to participate in this activity, there are some basic requirements of which you should be aware. The stock market is a wild rollercoaster; it requires steady nerves and a cool head and at the same time a healthy appetite for risk. Investing in stocks is one way to accumulate riches without going the more traditional way of being a business entrepreneur or a working professional, though it is preferable to keep stock investing as an interesting and lucrative sideline to your main occupation. Some guidelines on basic stock investing and how to buy stocks are described below. Read on to find out how you too can make money by investing in the stock market.
Know the ‘jargon'. Some of the most common terms you will keep hearing and use are - ‘stock', ‘share', ‘shareholder', ‘equity', etc. Stock or share mean the same thing and refer to the claim or ownership of a company of which you buy stock for a certain value. People investing in stocks of a company are referred to as ‘shareholders', your claim is represented by a document called the ‘share certificate' which provides the confirmation as how much stock or how many shares you own in that company.
While holding stock does not entitle you to interfere in the working of the company, your shares will provide you with votes (one share = one vote), to elect the company's board of directors at annual general meetings. As a shareholder, you are also entitled to take a share of the company's profits, based on its performance, which are paid out as 'dividends'.
Debt and equity financing. There are two ways in which a company can secure financing for its activities. 'One is debt-financing' in which the company will borrow required funds from banks and financial institutions or any other sources. The other way is ‘equity financing' in which the company owners divest some of their holdings and issue them as stock to the general public or to other institutions and entities. The first sale of stock by a company, by which it converts from a privately held entity into a public company, is called the ‘Initial Public Offering' or IPO.
Buying stock. There are a couple of methods by which you can buy shares that are available on the open market. You could sign up with a brokerage firm, or use DRIPs and DIPs. These are described in further detail in the following steps.
Buying through a brokerage. This is the most commonly used method of buying stocks. Two types of brokerages exist - full-service brokerages and discount brokerages. A full-service brokerage firm offer complete professional advice on your investments, give you guidelines on how to manage your portfolio and all kinds of assets, not just stocks. Of course, such firms charge you pretty steep fees and in the past, have been primarily the province of wealthy people. Discount brokerages, on the other hand, are a pretty recent development, rising to prominence with the onset of boom times and the growth of the Internet. Discount brokers only carry out buy and sell orders on stock, charge reduced commissions on transactions and offer no individual advice at all. Such brokers are best for people who are already savvy with the stock market and are able to research and pick their stocks, and only need an intermediary for the actual process of buying and selling. Discount brokers can be found both in real-time as well as on-line, the latter proving to be a very popular and easier method of trading for the general public at large.
DRIPS and DIPS. DIP stands for Direct Investment Plan, while DRIP is Direct Reinvestment Plan. In such schemes, you can buy shares directly from the company, at minimal cost and are the ideal choice for those who have small sums of money to invest. A DRIP is basically an extension of the DIP - you can use the dividends received from your DIPs to invest further in the company by buying up additional stock. Subsequent dividends will also be similarly employed until the period for which the plan is valid.
Having read through the guidelines above, you are now ready to dip your toes into the stock market and begin investing. Start slow and small, research thoroughly on companies and industry segments in which you want to invest and gradually build up a decent portfolio that will provide you with good returns.
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