1. Money
Send to a Friend via Email

How to Invest in Stocks

A Beginner's Guide to Investing in Stocks

By

Standard Oil Stock Certificate Signed by John D. Rockefeller

A share of stock is literally a piece of a business. Your long-term wealth from stocks depends on several factors: 1.) the price you pay for your share, 2.) the operating results of the company, and 3.) what you do with the cash dividends you receive.

Do you want to begin investing in stocks but have no idea where to start? This overview can help. It is designed as part of our Complete Beginner's Guide to Investing in Stock and provides a short checklist of topics, complete with links to much more in-depth articles, where you can study whatever it is you want to research in-depth. For the new investors out there, it's probably the best point at which to jump off as you can get many of the basics out of the way before moving to some of the more advanced topics about which I've written over the years.

How to Invest in Stock - The Four Major Ways to Invest

There are typically four major ways to invest:

  1. Through a 401k plan or, if you work for a non-profit, a 403b plan
  2. Through a Traditional IRA, Roth IRA, Simple IRA or SEP-IRA account
  3. Through a brokerage account
  4. Through a direct stock purchase plan or dividend reinvestment plan (DRIP)

How to Invest in Stock - The Five Types of Assets You Might Own

Generally, there are five types of assets the average investor is likely to own in their lifetime:

  1. Common stocks – ownership of businesses
  2. Preferred stocks – special types of stock that often pay high dividends but have limited upside
  3. Bonds – corporate bonds, municipal bonds, savings bonds, U.S. government treasuries, etc.
  4. Money markets – highly liquid funds that are designed to protect your purchasing power; considered to be a cash equivalent
  5. Real estate investment trusts or REITs – a special type of company designation that allows no taxation at the company level provided more than 90% of earnings are paid out to the shareholders. The assets are often invested in a variety of real estate projects and properties.
  6. Mutual funds including exchange-traded funds, index funds, and actively managed funds.

How to Invest in Stock - Doing the Research

When researching an investment there are typically five documents you want to get your hands on to research the relative merit of a potential stock:

  1. The 10K – this is the annual filing with the Securities and Exchange Commission (SEC) and is probably the single most important research document available to investors about a company.
  2. The most recent 10Q, which is a smaller version of the 10K that is filed at the end of each quarter instead of each year.
  3. Proxy statement – includes information on the Board of Directors as well as management pay and shareholder proposals
  4. The most recent annual report – read the report from the Chairman, CEO, and sometimes CFO or other high-ranking officers to see how they view the business. Not all annual reports are created equally. Generally, the best in the business is considered to be the one written by Warren Buffett at Berkshire Hathaway, which you can download from free on their corporate site.
  5. A statistical showing going back five or ten years. Several firms prepare this type of information, mostly for a subscription, such as a Morningstar, Value Line, S&P, and Moody’s.

How to Invest in Stock - The Three Financial Statements

There are three financial statements you’ll want to examine closely before you buy an ownership stake in a company by investing in its stock. These three are:

  1. The income statement
  2. The balance sheet
  3. The cash flow statement

They all work together and reinforce one another so you cannot study them in isolation or you will find yourself making decisions based on partial data; a mistake that can be costly, especially when you decide to invest in stock rather than a more senior security such as a bond.

How to Invest in Stocks - Some Other Tips and Helpful Resources for New Investors

Finally, there are some things you’ll want to look for in a company and management before you buy shares of stock:

And a few other things you may want to pick up on your investing journey:

From there, you can always read the thousands of articles I've published here on About.com about investing in stock, or head over to my personal blog for some of the more esoteric or advanced topics that aren't particularly appropriate for beginners. Whatever happens, remember that stocks are only one of many types of assets that you can use to build wealth and become financially independent. You don't have to invest in stocks to get rich, if you have a temperament that simply cannot handle large amounts of volatility, which is not avoidable in the equity markets.

Related Video
How to Invest in Stocks

©2014 About.com. All rights reserved.