Buy Stocks

How to Buy Stocks

So, you finally saved enough money and now think it’s time to put some of your hard earned money to work for you.  For most, the first thought that comes to mind is to go out and buy stocks.  You’ve received a tip from a friend or co-worker or maybe you read about a company in the Wall Street Journal or on a message board and you think you have found the next big idea.  Well, you might, but relying on this type of information is a recipe for losses over the long run.  Before you go out and buy stock in a company, you need to do your own research and be the owner of your decisions.  The term “research” is over-rated, especially for those of you who are new to buying stocks.  Most of you are not properly trained to read through financial statements and understand exactly what the financial position of a company is.  Heck, even many professionals have a hard time doing this.  For this reason, let’s keep our list of fundamental indicators to a minimum. 

For longer term investments, look to buy stock in companies with: solid management, steady dividends, long term history of positive cash flows, revenue growth, increasing EBITDA, a PEG ratio close to 1, and a debt leverage ratio (senior debt/ebitda) below 2.  When you buy stocks in these types of companies, you increase your odds for success.

At the end of the day, if a company wants to hide something, we won’t be able to spot it through the financials. For this reason, it is important to take a dual approach to analysis by learning how to read a stock chart as well.  Charts do a great job of showing you how many people are buying stock and how many are selling it.  The mysmp technical analysis education center and even our day trading center will provide you with all the information you need to learn how to buy stocks using time tested technical patterns.

Full Service or Discount Broker?

So now that you have the basics down, what’s next?  The next step is to choose a broker.  You need to decide whether you want a full service broker or a discount online broker.  Full service brokers typically charge a large premium for the “advice” that they provide you.  While some of you may feel more comfortable with this route, it is a far more expensive method to buying stocks as compared to an online broker.  However, if you do not have the time to invest your money, ask around and do you due diligence before selecting a full service broker.  You may want to consider the larger names such as Morgan Stanley and Schwab; however, be wary of a one size fits all approach to investing.  When you buy stocks online, stick to the leaders such as Fidelity, Scottrade, and TDAmeritrade.

Basics of Buying Stocks

In this day and age, it is no longer acceptable to take the buy and hold approach when you buy stocks.  All it takes is one market meltdown at the wrong time to cut your retirement funds in half.  To prevent this from happening, you need a plan at all times.  You should always have entry and exit criteria defined before you enter into a position.  Taking small losses of 5% or 10% will serve you much better in the long run than sitting in a 60% or 70% drawdown, hoping for the stock to recover.  There is an opportunity cost as well; you could enter into another trade which could be a big winner.  You need accept that you may be wrong and move on. 

Let’s now spend some time to review some of the basics that you should consider.  First, do not let your emotions or bias cloud your judgment when you are buying stocks.  Just because you love Krispy Kreme doughnuts does not mean you should be buying stock in this company.  Even the best products can be run by companies who have terrible management resources which run them into the ground. 

Second, never buy stock when you feel like you are chasing it, no matter how bullish you are on it.  Do you always ask why a stock that you just bought went down right after you bought it?  The majority will never be allowed to be right and remember that markets tend to put in tops with excessive euphoria while they tend to put in bottoms during extreme panic.  It is during these times that the institutions can move large amounts of volume without being traced and get the most opportune price.  The key is to be able to discern how to buy stocks before they take off.  The short answer is that you need to be able to understand what the big money players are doing.  This is where technical analysis is a very handy tool once you get the hang of of it.

Finally, there is no get rich quick scheme.  When you buy stocks, you should not feel like you are at a slot machine in Las Vegas.  Never bet the farm on a single investment; this is the quickest way to lose your money.  When in doubt, do nothing.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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