If you’re looking to buy chicken stock for Nana’s famous clam chowder, get yourself right to the soup aisle at the supermarket. But if you want to own a small piece of a public company listed on a stock exchange, you’re in the right place. We’ve prepared a big steaming bowl of valuable advice for you.
Once you decide to invest in a public company, though, what do you do? You can’t just show up at Amazon headquarters in Seattle waving a mitt full of money. You’ll be arrested, for one thing. The majority of companies require you to go through a brokerage firm or a registered individual broker.
“Brokerage” is just a catch-all term for any entity authorized to buy stocks. This might be a human stockbroker, a financial planner, or an online brokerage account. Fortunately, we know an investing platform that we think you’ll like. (It rhymes with “schmealthfimple.”)
How to start investing in stocks
Investing in stocks requires just three things: a broker to make the trade, money to purchase the investment, and an idea of what you want to buy. We can’t help with the money part, but we’ve got the other two covered here.
The easiest part of your journey to stock ownership will be to find a trading platform (if you want to buy and sell stocks yourself) or an automated investing service (to invest on your behalf). You could swing a lasso in any financial district and rope one, but in all likelihood, you’ll embrace the ease and minimal expense of investing online. The real challenge you now face is deciding exactly what you should be buying. An individual stock? A mutual fund? An ETF? Well, it all depends on your personal sitch.
Where to start investing in stocks
Thrifty, self-motivated investors who know exactly what they want might be best served by online brokerages, especially ones providing commission-free trading. For those that don’t want to pick their own stocks, automated investing services are a reasonably priced, user-friendly way to invest. Financial advisors and human brokers offer the highest level of service and can also include investment advice, but are also the most expensive option.
Stock picking is extraordinarily hard. Famously rich stock picker Warren Buffett has spent the last decades discouraging pretty much everyone not named Warren Buffett from trying to make money picking individual stocks. He says as much:
The thing is, most professionally managed funds also underperform the market. So, what are you supposed to do? Instead of picking individual stocks or giving your money to someone who is paid to pick individual stocks, you can also invest in index funds, which spread investments across a bunch of companies and try to mimic the performance of the market as a whole.
How to buy stocks online
If you already know what stocks you want to buy, the absolute easiest, cheapest way to buy them is through an online discount brokerage. Accounts can be opened in 10 minutes if you have a social security or social insurance number, a home address, and an employer’s address — even if, in the case of the self-employed, your bedroom is your office and casual Friday means “pants discouraged.”
Account minimums vary considerably in the minimum investment they require to open an account. They also normally charge a fee for each stock you trade. Most will assess a flat per-trade commission fee for any stock purchase, big or small, that generally ranges from $5-$10 per online trade. If you have a small amount of money to invest, look out for a provider that offers a low minimum investments (or no minimum at all) to open an account.
Most brokerages do employ humans to execute trades, but they’ll charge a lot more if you need to use one. In the last decade, a few investment providers have started offering commission-free trading, so every cent you pay goes directly into your stock investment, not into the brokerage’s coffers.
Also important to know: stocks are by nature volatile. They can rise and fall precipitously. There’s a good reason every stock or mutual fund prospectus you’ll ever pick up includes the disclaimer, “Past performance is no guarantee of future results.” It’s 100% true! The reason that stocks historically perform better than safer, conservative investments like government bonds is because investors are rewarded for risking more losses.
How to buy stocks without a broker
While it is possible to buy stocks directly from companies like Coca-Cola through direct stock purchase plans, there’s typically little reason to avoid brokers. Brokerage accounts can now be opened online in minutes and may offer commission-free trading. If you’re interested in trading without a broker, our guess is that you consider trading online, where you choose, and buy your own stocks through an exchange. Well, surprise: that exchange is your broker.
How to reduce risk
When you’re talking about risk in the investing sense, you’re talking about the risk of loss in the short and medium term. There are two basic ways to reduce it:
(1) through diversification, by holding groups of stocks that have different reactions to market events (like from different countries or industries) and combining them in a portfolio with other asset classes like bonds or even gold. The advantage of diversification is often you can reduce risk without sacrificing expected return.
(2) by holding less risky assets — for example, less risky bonds — in addition to stocks.
If one day Amazon delivery drones start attacking pedestrians and the stock craters, won’t you be better off if Amazon represents just 1/100 of your portfolio versus 1/2?
One simple way of receiving broad exposure to markets is by purchasing a mix of domestic and international low-cost ETFs (exchange-traded funds). Though ETFs trade on exchanges just like individual stocks, many contain dozens or even hundreds of stocks. You can also have an automated investing service do this for you. With one single purchase, you’re able to track some or all of a country’s entire stock market rather than putting all your eggs in one stock basket and zeroing in on a handful of stocks.
How to make money on stocks
There’s no sure way to make money in stocks, short of inheriting a magic pig that sniffs out tomorrow’s Amazon. But a good option that gives you the potential to make money on stocks is holding them for a long period of time. This period is often referred to by the Star Trek-sounding term “time horizon.”
If you need money for a specific purpose in the near term, natural stock fluctuations mean it may not all be there when you need it. The most conservative will keep their money in a high-interest savings account or government bonds that will mature when the payment is needed. If you have more than you need to spend in the short term, investing in stocks or other risky assets can be a good way to try to grow your wealth and keep pace with inflation.
Historically, those with the patience to hold stocks for 10 or more years are more likely to be rewarded with positive returns that offset short-term risks. It’s a pretty simple lesson on how averages will eventually wash out the stock price outliers (which might be either good or bad). In other words, the more time you hold a stock, the less variable its price will be on average. Stocks are never precisely safe, but stocks held longer are safer.
When should I invest in the stock market?
Today is the absolute best day to invest in stocks. Without a time machine, it’s the soonest day possible. There is no perfect time to enter the stock market, but the longer you’re invested, the likelier it will be that stocks will provide higher returns.
How to buy a fractional share of a stock
Many well-known tech stocks like Amazon and Alphabet may be out of reach for all but the richest investors. Some tech stocks trade for well above $1,000 per share, but some trading platforms, including Wealthsimple, allow you to buy part of a single share. It’s a fraction of a share for… a fraction of the price.
While some services have started to offer fractional shares, and even gift cards, the absolute best way to get a fractional share is an ETF. When you invest in exchange-traded funds (ETFs) made up of stock, you’re essentially owning fractional shares. Exchange-traded funds are investments comprised of large swaths of investments from different stocks to bonds and real estate. Since ETFs trade on the stock market, buying a unit is as simple as buying a share in a company.
How to buying Canadian stock
Canadians can buy any Canadian stock about as easily as they can order a parka. Signing up with a trading platform is free and requires about the same amount of information Canada Goose’s website would ask of you during a sale. If you don’t want to trade yourself, automated investing is a great alternative.
Beginner tips for investing in stocks
The best thing to start is to buy diversified portfolios of stocks and bonds with ETFs. If you would like to buy individual stocks, it is best to keep the exposure low (like under 5%) so that you won’t suffer too much if the stock experiences poor performance. The odds of any particular stock doing well are low, but the odds of a portfolio of stocks gaining in value increases over time. Likewise, it is best to keep the proportion of your assets that you use to pick individual stocks at a small percentage of your overall portfolio (like 5%-10%).
What to look for when buying a stock
Stock picking is hard. So hard in fact that most studies show that even professionals paid to pick stocks will fail to outperform the overall market over the long term. Here’s why:
You, person who wants to buy a stock, are super smart (and, may we add, easy on the eyes to boot). But you have to buy that stock from someone. That person might be super smart too and she has exactly the same information you have (or, if she’s breaking the law and engaged in insider trading, significantly more). She has decided the stock is worth selling at, say, $10 a share because it’s definitely going to go down, and you’ve decided it’s worth buying at that price because it’s definitely going to go up. Who’s right? How sure are you that you’ve synthesized all the available information better than other investors? No offense, but what makes you so darned special?
For this reason, buying a stock is nothing like landing a $1,000 suit for $200. Through the law of supply and demand, the market has already worked all its special price-discounting magic. All of the information the market knows is already baked into a stock’s price — revenue, growth, and historical prices.
There are two main ways you make money on a stock. The first is if the company outperforms the market’s expectations. The second is through what’s called the “equity risk premium,” the percentage over the so-called “risk-free rate,” or the current interest rate you could get by putting your money in risk-free government bonds. Over the long term, investors will be rewarded for taking on risk, and any increased risk must go hand in hand with increased potential reward. This concept keeps stocks viable; if a stock wasn’t expected to outperform the risk-free rate, investors would just stick with the safe money and a stock price would crater.
But, if you understand the risks, there is nothing wrong with devoting a small percentage of your portfolio to one stock; there are now mobile apps that allow you to trade stocks commission-free.
One super-easy way to test your stock-picking talent? Write down your reasons for buying a stock, but don’t actually buy it. Wait for a predetermined period of time and, if the stock moves the way you’d predicted for the specific reasons you predicted it would, you might be ready to put some real skin in the game.
Stock market terminology
Here are a few basic concepts that you should absolutely understand before you even consider buying your first stock:
Revenue growth: If a company is public, it means it must publicly share its financial status on a quarterly basis. Is it bringing in more money than it did last quarter? Graphing historical revenue numbers will show if a company is on an upward, a downward, or a flat trajectory. A steady line upward is a decent indication of what’s to come.
Historical price: This might seem obvious, but the longer a company’s been around, the more information you have to use to assess the general health of a company. If it has been able to weather lousy economic conditions, sector downturns, and other business calamities and its stock has still managed to move up, they’re doing something right.
Earnings per share: Earnings are the amount of money left over after all a public company’s bills have been paid. Earnings per share (EPS) is simply that dollar figure divided by however many shares the company has sold. Higher EPS is obviously better and can drive a stock price upward, but it can be tricky because companies have been known to buy its own stock to reduce the number of outstanding shares, thereby artificially goosing their EPS numbers.
Price/earnings ratio: Since so-called P/E ratio is a number that can be computed for any public company, it’s the most prevalent way to assign relative value to stocks. It’s an apples-to-apples comparison, as fruit metaphor lovers say. Simply divide the current stock price by the earnings per share value of the last four quarters and out will pop a number that reflects how many dollars investors are currently willing to pay for every dollar of annual earnings. For this reason, it’s often called the “price multiple.” The average P/E ratio of S&P 500 companies is around 21. A much lower number might suggest a company with lower expectations, and a higher one a company with higher expectations. Over the long run, stocks with lower expectations have tended to outperform as a whole. Or it might not! But it’s data. It’s up to you to decide if you agree or disagree with that number.
Dividends: Some companies offer dividends, a kind of profit-sharing program for investors. Investors receive a specific dollar figure on a quarterly basis that has no direct relationship to the stock price (though a company board may decide to increase or decrease future dividends it pays based on its financial health). Researching dividend programs can be super valuable because, in some cases, the dividends a company throws off can equal as much or more than one might expect to earn from a savings account. (Of course, unlike bank accounts and interest, stocks can fall and dividend programs can go away altogether.) Tracking if companies have consistently provided dividends, or even raised them, is one indication of a company’s health and possible future stock performance.
