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Do you like the idea of putting your faith in a company that you believe in? Or maybe you’ve identified a firm that has the potential to become a market leader in its industry, and you ‘want in’ on the action.
Whatever your motivations, buying stock allows you to own a direct a slice in a company, or companies. But how do you actually buy stocks? And what are some important ‘need-to-knows’ that investors should bear in mind?
In this article we answer the above questions and more, so keep on reading for all the details or click on a link to head straight to one of the two sections…
When you buy a company’s stock, you’re essentially purchasing a small ownership stake in that company. This means if the company’s value increases in the future, the value of your stock will also go up. Conversely, if the company’s value decreases, then your stock’s value will fall.
In addition to the potential for capital gains, stockholders can also receive dividend payments. However, it’s important to note that not all companies pay dividends.
Stocks are typically traded on stock exchanges, such as the London Stock Exchange. While some companies offer their stock directly to investors, most stocks are purchased through brokerage firms.
Despite sounding a tad complex, buying stocks is actually rather straightforward nowadays, mostly thanks to the introduction of various mobile investing apps that have sprung up in recent years. You can now buy stocks in seconds, and at the click of a button.
If you’re interested in buying stocks then it’s worth getting your head around the following steps to reduce your chances of making costly mistakes.
From understanding your financial situation, to choosing a suitable investment account, do try to digest as many of the following steps as you can…
While it may be tempting to dive in and buy shares in the ‘next big thing’, it’s really important to first make the effort to understand whether dabbling in the stock market is the best use of your money.
For example, if you’ve outstanding (non-mortgage) debt which you’re paying interest on, or you don’t have any sort of emergency fund, then it’s probably worth getting these things sorted first, before entering the choppy waters of the stock market.
Remember, when it comes to investing, there really are no guarantees. You can lose money. This is why you should never invest more than you can afford to lose. So if you don’t have financial stability, then prioritise this before buying stocks.
Setting clear investment goals is one of the most important rules of investing. After all, if you don’t know what you’re investing for, how long you plan to invest for, or your tolerance for risk, then how will you know which stocks to buy, or which sectors/industries to invest in?
To get you started on this point, take the time to read our article that explains how to create your investing strategy in 5 simple steps.
It can be difficult to compare all the investing platforms available out there – especially when it comes to weighing up the pros and cons of each.
Yet spending the time to research providers, especially when it comes to fees, will almost certainly be worth the expended time.
That’s because fees charged by providers can vary massively from one broker to the next. For example, one platform may offer low platform fees, but make up for it with high share dealing fees. Meanwhile, another provider may have high platform fees, but low, or zero share dealing fees. Some providers offer a mix of both.
Because of these differences, the cheapest provider for you will depend on your personal investing style. That’s why it’s worth getting your head around the differing fees charged by providers, and going with a broker that has a fee structure that’ll work best for you.
For more on this, see our article that explains platform fees vs share dealing fees.
Once you’ve understood your finances, investment goals, and you’ve chosen an investing platform, it’s time to choose which stock (or stocks) to buy.
Sadly we can’t tell you which stocks to buy. And that’s not just because we’re unable to offer investment advice! Even if we could, no one really knows the future price of any stock. Even the experts get it wrong!
Yet if you’re on the fence about which stocks to buy, then this is where doing your own research comes into play. For example, if you’re interested in buying stocks in a particular organisation, then you may wish to use public information to analyse the company’s financials and recent performance.
You may also wish to study the general performance and/or potential of the industry it operates in. That way, you’ll at least have a better understanding of the ins and outs of a stock you’re interested in. This may, or may not, give you the confidence to determine whether you should invest.
Whichever stock you choose to invest in, it’s worth understanding the importance of holding a diversified portfolio. In short, don’t put all your eggs in one basket!
Once you’ve done your research and chosen which stocks to buy, don’t fall into the trap of thinking your work is done…
Regardless of the size of your portfolio, it’s really important to keep an eye on your investments. One of the biggest reasons for this is that it’s likely the value of your portfolio will have changed over time.
Therefore keeping on top of your investments can help you ensure you remain aligned with your personal tolerance for risk.
Keeping an eye on your investments can also help you determine whether you’re on track to achieve your financial goals. This is important, for example, as if your investments are underperforming, then you may wish to either modify your financial goals, or raise the stakes by taking on more risk to seek higher returns. Of course, the tradeoff here is that you may suffer larger falls.
On the flipside, if you find your investments have overperformed, then you may wish to reduce your risk exposure by selling some of your stocks, and moving your capital to less volatile assets, such as bonds, precious metals and the like.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.