investing101

Buy Stock: Making Your First Trade and Which Stocks to Buy

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I want to make my first stock trade. How do I find stocks to buy?

That is a very good question. Finding stocks to buy is easy, but finding GOOD stocks to buy is challenging. Everyone has their own opinion on which stocks to buy and how long to hold them.

The first thing you need to know about trading stocks is that each stock is assigned a Ticker Symbol by the stock exchanges. The Ticker Symbol is a unique combination of 1 to 5 letters the exchanges use to identify stocks. In order to trade stocks on HowTheMarketWorks you must know the ticker symbol of the stock you are thinking of buying. All of the tools here will list the ticker symbols.

Next, when you are thinking of spending real money on stocks, there are several factors to consider when thinking of which stocks to buy:

  • How long can you wait before you might need the money?
  • How much risk can you take?
  • How many stocks do you want to buy initially in your portfolio?

In terms of your HowTheMarketWorks portfolio, here are suggestions to help build a good portfolio:

  • Trade What You Know! Identify 5 to 10 stocks that you are interested in that you actually know something about. Think of where you, your friends, and your family spend money–food, clothes, travel, toys, banks, technology, etc. Where are you spending more money than you used to?
  • Diversify! This means don’t put all of your eggs in the same basket. Find a food company (think Coca-Cola, Pepsi, Kroger, Whole Foods, Proctor and Gamble, McDonalds, Starbucks), a travel company ( think Delta Airlines, Marriott Hotels, Ford, General Motors, BP Gas, Exxon), a bank, a technology company, etc. and make sure you are buying stocks in different industries.
  • Don’t spend all of your money at one time! Stock prices and the overall market move up and down all the time. You don’t want to spend all of your money today only to have the stock market decline 5% this week! You want to buy stocks when they are cheap and you want to to sell them when they are higher in price. If you think you want to buy 200 shares of General Electric (GE), then try buying 100 shares today and 100 shares next week or whenever you see the price decline slightly. In a bull market, this is called buying on the dips!

To help you get other trading ideas, the site is full of links to various resources, but here are the most popular ones:

  • Our Stock Screener allows you to look for stocks based on price, volume, earnings, and industries.
  • To see the most popular stocks that other HowTheMarketWorks users are trading, take a look at these stocks to buy on our Popular Stocks page.
  • To see the largest U.S. companies and their stock symbols, take a look at our Top 500 Stocks
  • And if you are feeling lazy or luck, you can always pick stocks at random with our Throw Darts at Stocks tool.

Price to Earnings Ratio, Risk & Timeline

If you want to be conservative and keep your risk low, you should choose a few stable, blue-chip stocks like GE and hold them for a few years. The downside is that conservative stocks usually don’t gain value very quickly.

todayOn the other hand, if you want to take some risks and try some more volatile stocks you have a chance at making a larger and faster gain. A good example is to buy Google stock.

Some of the riskiest stocks you can buy are Penny Stocks. They can give you the highest return (or loss!) in the shortest amount of time. They are usually not stocks one wants to buy.

Ensure and Increase Your Safety with Diversification

The more stocks you purchase, the more safe you will be in case one stock drops significantly. Experts often recommend 30 to 100 different stocks but that is often not practical to do. Of course, you will probably also make less money because some stocks will go up and some will go down. You will probably also want to buy from a few different industries so that you will be diversified in case one industry goes sour.

Price to Earnings Ratio

Many people like to use a company’s stocks P/E Ratio to determine whether it’s a good buy or not.

The Price to Earnings (profit) Ratio can give you an indication of how high a stock’s price is relative to how profitable it is.

The best thing to do is to compare one company’s PE ratio to other companies in the same industry to see how high or low the price is. What can happen is many, many people can trade stock in a good company, which will cause the price to go much higher than it’s really worth.

See an example of stocks to buy now Microsoft’s industry P/E ratios using Yahoo! Finance (scroll to the bottom).

Good Stocks for Long-Term Growth

Basically, you want to buy stocks that will go up in value over time. That may mean that you need to find some that are currently undervalued, using the PE Ratio or something similar. Or, you might look for companies that show potential to grow significantly over the next few years. But you should try to avoid buying stocks that are overpriced just because they are popular at the moment. That can lead to a quick loss! So it’s important to do your homework when looking for the best stocks to buy today.

Buy Stocks for Your Goals

The stocks to buy are the ones that fit your time frame and risk level. The “experts” in the stock market don’t always have your best interests in mind so you may want to consider asking trusted friends and relatives if they know any good stocks to buy instead.

simulator Trade Stock with our free stock simulator!

Stocks to Buy

Buy direct. Some companies offer direct stock purchase plans (DSPPs). Search online or call or write the company whose stock you wish to buy, to inquire whether they offer such a plan, and forward you a copy of their plan’s prospectus, application forms, and other relevant information. Most plans allow you to invest as low as $50 per month, automatically withdrawn from your bank account. Pay close attention especially to the fees involved. A few companies, such as Procter & Gamble (see here), offer no fee investment plans. DSPPs also allow you to reinvest all your dividends automatically. Some companies even give you a discount, such as 5 percent, for dividend reinvestment.

Use an online discount broker. Search for “online discount brokers” on a search engine to find a list of brokers that you can use to buy and sell stocks online. Be sure to compare their fees and see if they have any hidden fees before signing up. Minimizing fees and expenses is key to successful investing. Most discount brokers charge less than $10 commission per trade, regardless the size of the trade. Some brokers may even offer a certain number of free trades, provided you meet certain criteria, so make sure you read carefully before committing to a broker. The best brokers also offer no fee dividend reinvestment, good customer service, and various research tools for customers.

  • Some brokerages have varying levels of services; pick one that is best for you.
  • Send the broker an initial deposit of funds. (Your broker needs this money to purchase your stocks.) The usual minimum is $2000 but can be as little as $500.00. Some online brokers don’t require a deposit at all.
  • Your broker must report your stock trades to the IRS. You will need to fill out the required forms and mail them back to the broker, possibly even before they will allow you to make your first trade. (Your broker will send you the forms.)
  • Select your stock, notifying your broker of the company’s “symbol” (a 1-5-letter code), the price you’re willing to pay per share, the number of shares to buy, and the length of time for which your offer will be valid (e.g. Single day vs. Good till Cancelled). Instead of specifying a price you are willing to pay (call a ‘limit order’), you may also put in order to buy at the market, which means you order is immediately filled at the current ask price for the stock.
  • Alternatively, use a full service broker. A full service broker is similar to a discount broker as discussed above, except that they charge considerably higher fees, and offer investment advice and more research tools. Because full service brokers are paid mostly by commissions, it is in their best interest to encourage you to trade as frequently as possible, even though it may not be in your best interest.

 

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