Stock (MP) The world is filled with people ready to offer you advice about buying stocks off and online. The world wide web can deliver to your computer a wealth of investment advice, once, only available to professionals. However, remember when you purchase stocks, it’s your money, and it’s serious business. You owe it to yourself to get educated by reading up on all the information available, before you buy.
Today, with just a few clicks of the mouse – buying stocks online is easy. But before you start clicking, there are a few things you should understand, including, how to pick the right broker, how much to pay, and other pertinent investment considerations. Let’s lay some groundwork to help you get started buying stocks.
Buying stocks is about having the right formula
1. Select a brokerage account!
To buy stocks, you’ll need to set up a brokerage account, where you can deposit funds and place investment orders. Starting a brokerage account online is usually free, but often requires a minimum deposit, which can range anywhere from $500 to $2,000 or more. With Scottrades it’s much cheaper to start out!
You will also pay fees for each transaction you make – buying or selling a stock can cost you anywhere from $5 to $10 or more in commission fees, depending the online brokerage house. Remember, good advice, including stock picking, comes at a price. If you want to make your own buy and sell decisions, you must select your own stocks.
2. Do your own trades and save!
If you’ve good at research and follow MoneyPacers regularly –you can set-up brokerage accounts and trade stocks and other online stock trading products for very little money. There are support services and tools to allow you to find stocks that align with your investment goals. Depending on the type of investor you want to be and say you have $25,000 to invest, it may be a good idea to get approved for day trading. Even if you are not planning to-day trade, you can still buy and sell multiple stocks as necessary, without restrictions. And while you’re here read up on the four stock exchanges.
3. How to pick the right broker?
Picking the right online broker depends on your personal situation and your own individual investment needs. If you are planning to trade stocks actively, you should try to focus on a broker that charge low commissions and offers free trade promotions. If you have very little money to invest, initially, you should look for brokerages that require a small minimum opening balance. Other factors to consider include the range of product offerings, the level of customer service, help and support. Do the provide free research and educational tools? Does the firm have a mobile app, and the quality and ease of the trading platform.
Barron’s, the weekly investment magazine offers several “Roundtable” issues a year, where leading investment professionals offer their thinking on the months ahead –and on the stocks they favor. Keep a look out at your local newsstand or online and buy those issues.
4. How much should you pay?
Unfortunately, the only truthful answer – it all depends and what it depends on is the future. The measure of a stock’s relative value is the ratio of price to earnings or P/E as it is also known. A P/E of 1 is too much to pay for a company on the skids, with one foot already inside bankruptcy court. A P/E of 100 might not be too much to pay for a company with awesome future prospects, that – a year from today – might be selling a 200 times earnings. So, again the price you pay for growth, and what makes up a reasonable P/E all depends on what happens tomorrow, and next year, and next decade.
Price isn’t always as important as other criteria when buying stocks online. As a sophisticated investor, you’re investing for the long haul, so some of the other factors of analyzing a company’s financial well-being come into play. Here are some other considerations when buying stocks online:
Dividend Yield: A stock’s annual dividends divided by its current price, multiplied by 100. Top performing stocks may yield anywhere from 2.1% up to 25% (for tech stocks).
Breakdown: A high dividend yield usually indicates either a value stock or a company in financial trouble. A low dividend yield generally is a sign this is a growth stock or a young company.
Buyback Yield: When a company buys back outstanding shares and returns the cash its shareholders.
Breakdown: When a company purchases 50 million dollars worth of its own stock and its market cap was 500 million, the buyback yield would be 10%. Presumably, management then spreads the love out to its shareholders. Typically, top performing stock may yield from 7.1% to 20.2%.
Price/Earning Ratio: A company’s current stock price usually divided by its latest (sometimes projected) 12-month earnings per share.
Breakdown: As a rule, stocks with low P/Es are out of favor with investor. The higher a stock’s P/E the more in demand it usually is.
Price/Sales Ratio: A company’s current stock price divided by its total sales or revenue.
Breakdown: This measure is less useful than some of the others for finding a stock selling at a bargain price because a company’s sales or revenue tens to stay fairly steady unless the company is in serious, maybe fatal, trouble. Remember, it most often is used these days to evaluate a company that doesn’t have any profits, and so doesn’t have a meaningful P/E.
Price/Book Ratio (also called Book-to-Market Ratio): A company’s current stock price divided by its book value, or what ist would bring if it went bankrupt ans were sold, per share.
Breakdown: A low price/book ratio indicates a stock is selling close to its liquidation value. A high price/book ratio tells you a stock is selling above its liquidation value. The higher above liquidation value a stock sells for, the less of a bargain it is likely to prove.
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