How to buy and sell stocks

Friday, July 1st, 2011 By

Boxtop for a boardgame called “The Stock Market Game.”

Get your head in the game with this primer on how to buy stock. (Photo Credit: CC BY-ND/Chris Brooks/Flickr)

Ever wanted to learn how to buy stock? You’re in the right place. Learn what a stock is, how to choose good stocks and some of the basics of buying stock with this “stocks for dummies”- style guide.

What is a stock?

Essentially, buying stocks means buying partial ownership in a company. If the financial fortunes of the company improve, share value generally increases. The reverse can also occur. If you purchase shares at $10 each, then the share price skyrockets to $30 each, you’ve tripled your investment dollar, minus brokerage fees at sale. The classic investing phrase “Buy low, sell high” can truly be a gateway to financial security.

What stocks should you choose?

The Motley Fool demystifies the decision-making process by breaking it down into its component parts. With some due diligence that includes research into corporate earnings, revenue, cash flow and more, you too can chart safe investing waters.

Read the company’s balance sheet: This is the record of the company’s total assets and liabilities. Corporate balance sheets are available for research purposes via the Securities and Exchange Commission EDGAR website.

Understand valuation: Think of a share of stock as a stand-in for a share of corporate revenue, earnings, cash flow, etc. The portion of these that is paid to individual investors is called the dividend. If a stock has a good dividend yield – a high valuation – the more desirable it is.

Get a good return on equity: Return on equity (ROE) measures how corporate management works to increase the value of a company – through profitability, asset management and financial leverage. If the executive team manages these well, stock value rises.

Return on Invested Capital (ROIC): This is the amount of return on each dollar invested in a company, the “real cash-on-cash return.” ROIC is considered an accurate tool for measuring corporate earnings growth.

Where to buy stock

There are two basic ways for beginners to buy and sell stock:

  1. Through a brick-and-mortar brokerage service.
  2. Through an online brokerage.

Online brokerages have become increasingly popular, due to their convenience and flexibility. So long as you’re 18 years or older, you can deposit cash or stock in a brokerage account and get started. Companies like Charles Schwab and Smith Barney offer accounts that investors can manage online themselves, or use a live broker for added cost. Sites like E*Trade, TD Ameritrade and Sharebuilder offer respected online exchange services.

Brokerage fees will apply to most buy and sell transactions, the Wall Street Journal reminds. These fees can vary greatly by brokerage. Popular online exchange services charge in the neighborhood of $5 to $25 per month, with additional per-trade fees and minimum purchase requirements. If you wish to avoid fees entirely, sites like DRIPInvestor lists companies that sell direct to investors.

Additional information on investing is available via sources referenced in this article.

A stock market primer

Sources

Charles Schwab

DRIP Investor

E*Trade

Motley Fool

Securities and Exchange Commission EDGAR

Smith Barney

Sharebuilder.com

TD Ameritrade

Wall Street Journal

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