You know you're supposed to put your savings to work "in the market," but you're not quite sure where to begin. Here's a step-by-step approach to buying stock.
Someday, you may be able to buy stock at the grocery store. There you'll be, pushing your cart down the soup aisle, running through your list: milk, ketchup, Diet Coke, and there was one more thing...oh yes...27 shares of Microsoft. Wouldn't it be nice if buying stock was that convenient?
Step 1: Choose a broker
Start by knowing your options and collecting recommendations from family and friends. You can select a full-service broker who can act as your personal investment manager. She can help you with research, advice, and your overall investment strategy. However, it might be costly. You can save on commissions with a discount broker. They won't provide advice specifically for you, but most offer access to research and financial planning for a small fee.
Step 2: Clarify your investment goals
You can earn investment returns in two ways: growing the value of your portfolio, or earning income through dividends. Growth stocks are the ones that you want to buy low and sell high, although you can't guarantee that result. Income stocks generally have more predictable returns, but you won't get any big jumps in the stock's value. Know what type of returns you want: growth over time, regular income now, or a little bit of both.
Step 3: Set your budget and timeline
Decide how much cash you can invest in your portfolio and how often you'll put in more. Also, think about when you might need to convert your stock holdings into cash. The more time you have, the more aggressive you can be with your stock picks. If you'll need the money within five years, however, your choices should be conservative.
Step 4: Plan for diversification
If you own only one stock, it takes just one scandal to send the value of your portfolio plummeting. Diversifying your investments among different companies and industries will spread out your exposure, so that no single stock can wipe out your savings.
Step 5: Make your picks, do your research
Buying stocks strategically can take an incredible amount of research. If you aren't sure where to begin, start with companies and industries you already know. Make it a habit to read investors' newsletters and the daily financial news. You'll need to learn certain things about all your investments. How is the company's financial health? Their past earnings, and future earnings outlook? What's happening generally in the industry? What factors affect demand for the company's products and services? Don't forget the risk versus return trade-off: You have to take on more risk to get higher returns.
Once you're comfortable, start trading. Building a stock portfolio is admittedly more complicated than picking up some bread on the way home from work. But then it should be, because you can't retire on bread alone.