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A good friend of mine asked me for some assistance in how to get started with the stock market and I needed a topic for this morning, so let’s put two and two together and see if I can’t come up with something. Step One – Find a Broker I didn’t have to search too long for a broker as I already had an ING Direct Orange Savings account and kept hearing about their other services, one of which was [Sharebuilder]. I’ve been using them since I started investing and I have no complaints at all with their services. Signing up is relatively easy and they offer a lot of services, even to their basic members (who don’t have to pay a monthly subscription price). Step Two – Find Some Stocks One really handy thing about Sharebuilder is that they have a research tool wherein you can look for stocks to buy by setting certain qualifiers such as the price range you’re looking for, the exchange (NYSE, NASDAQ, AMEX) and industry you’re looking for, the volume of the stock traded daily, as well as some other qualifiers. For my own portfolio, I’ve worked from two different lists – one at [Alt Energy Stocks] and one at [Dividend Detective]. Those are long lists, and don’t offer a lot of information, but that’s where the next step comes in. Before you move on to step three, write down a list of the stocks (and their symbols) that pique your interest for whatever reason. Step Three – Research Them Thoroughly Once you get your list together, head back to Sharebuilder and enter the symbol of your stock in the Get Quote box to the right of the page. It’ll give you quick quote of the day’s progress and give you the option of checking out a detailed quote. Go ahead and do this! Once you do, look over the Quote tab for the basics. The most important things to check on that page are the Price to Earnings (P/E) ratio, the annual dividends, and the stock grade (which you only get through their Advanced service). Even with the P/E ratio and dividends, you can make a fairly educated guess on whether it’s worth proceeding further or not. From what I’ve gleaned, any stock that has a P/E ratio over 20 is overpriced and if you’re dead set on buying it, wait until the stock price drops a bit and then buy it. It’s a little hard to accurately predict what price you’re going to buy at if you’re going the automatic investment route through Sharebuilder, but if you do a real-time trade, you can buy it at the current price with an additional fee attached. With dividends, if it just says “No” there, then I say “No” as well to purchasing it. Again, from what I’ve gleaned, if a company doesn’t offer dividends, they’re more concerned with profits than their shareholders. Not especially conscientious if you ask me. As for a good value to look for, I like ones that have at least $1.00 for an annual dividend, which means you’ll get at least $0.25 a quarter per share. You can also reinvest these dividends through a dividend reinvestment program (DRIP) which Sharebuilder takes care of for you, and it will also help grow your investment faster. If you need the cash from the dividend, go ahead and use it, but if you let each dividend reinvest for even a few quarters, your investment will grow that much faster. If they pass those two tests, head to the Profile tab in Sharebuilder and check out the company’s website. There should be a link that says Investors or Investor Relations that will have a ridiculous amount of information on the performance of the company and its shares. The dividend history page is the one I find most interesting, as it shows what the company has done with its dividends over the years. It’s a good sign if they’re slowly increasing over the years, as it shows the company is doing well and is interested in passing that prosperity on to their shareholders. Back to Sharebuilder, there are two more metrics I like to check – those being Yield and Total Debt/Equity. The yield is the percentage of money that is returned to the shareholder in relation to the price of the stock. Say you have a $20 share of stock that pays a $1 annual dividend. You’d be getting a 5% yearly return on your investment (or a 1.25% quarterly one). Of course, if you reinvest that dividend, each quarter you’ll get a little bit more value since you can buy percentages of shares these days. As for a good yield to look for, 5% is pretty decent. Most of the huge stable companies that grow their dividends year after year are lower than that (and are expensive stocks as well), but they’re very safe and will really grow as time passes. As I’m younger and have the option of playing a little more fast and loose with my income, I have some investments in a few companies that have double-digit yields, but a lot of them are very high risk, so do your research accordingly. I’m also partial to utilities, though they’re not growers (for the most part). The prices are stable, the dividend payouts are stable, the yields are usually pretty good (~5-7%) and unless we go back to a log cabin culture, people are going to need handy stuff like electricity and running water. I could talk about yields and dividends more, but I’ll move on to the last metric – the Total Debt/Equity. This is the overall ratio of how a company’s debts compare to their assets. A low number is a very positive sign, and most of my investments have a Total Debt/Equity under 2. After researching those things to your satisfaction, it’s time to move on to the next step! Step Four – Invest If all of the above metrics meet your requirements, then go into the Trade tab on Sharebuilder and choose either Real-time Trades or Automatic Investing to buy these stocks. I like Automatic Investing, since I can pick my stocks on Saturday (unless there’s a holiday coming up) and let Sharebuilder do all the heavy lifting. I know a stock price will fluctuate between the time it’s picked on Saturday and purchased on Tuesday, but it’s likely to be less than the price of a real-time trade and sometime it works in your favor as the price can go down in that time. Lower price equals more shares and more dividends at the end of the quarter. I know I missed quite a bit and I’m no expert, but so far I’m pretty happy with my portfolio and I wish you all the best in your forays into the stock market! Discuss this post at [The Forum of Jason Vincion]! Posted on May 21st, 2010. |
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