Guide to Understanding How to Invest in Stocks

You can research stocks by looking up their ticker symbol in the newspaper.
i Jupiterimages/BananaStock/Getty Images

You can invest in stocks by purchasing shares in individual companies or by purchasing shares in funds that invest in stocks. Some investors like to set up regular monthly investments while others prefer to make investments occasionally. Buying is simple, but you need to continually educate yourself and stay on top of your investments.

Educate Yourself

Before you dive head first onto Wall Street it is imperative that you understand what you're getting yourself into. Read up on how the markets work in general and about specific investments. You need to know the risks involved, and you must identify your investment goals. Each stock has a “ticker symbol,” which is the abbreviation under which it is listed on a stock exchange. Mutual funds and exchange traded funds (ETFs) have similar symbols. You can research equities through these symbols in newspapers, financial publications or online. Before investing in an individual company, make sure you know what its business is and why you think it's a good investment. With mutual funds, make sure you read the fund prospectus, the document that details its objectives and fees.

Individual Stocks

Buying individual stocks leaves it to you to research each company and to keep track of when to buy more or sell. If you're a good stock picker, you can make a lot of money, but also remember that if just a few companies do badly so will your investments. You may have heard people talk of investing in “penny stocks.” These small company stocks are not listed on the large exchanges and many companies do not file financial reports with the Securities and Exchange Commission (SEC), so there is lack of reliable information and a risk of fraud. Shares can be purchased through some brokers, but buyer beware.

How to Buy Individual Stocks

The most common way to purchase individual stocks is through a brokerage firm or financial services company. There are many reputable discount brokerages on and offline with relatively low fees. You pay a fee each time you buy and sell. More than 1,500 companies also sell their stocks straight to individuals through Direct Purchase Plans. They charge modest transaction fees, which charge still lower than even discount brokerages. You can call companies directly or conduct an online search to find out who offers these direct plans, and you may be pleasantly surprised to discover that many are household names.

Mutual Funds and ETFs

Mutual funds combine your money with the assets of others to invest in a portfolio of stocks. There are mutual funds for just about any type of industry or sector you can imagine. Large company, small company, international, telecommunications, energy, technology and real estate are just a few examples. ETFs are investment companies with holdings linked to one of the stock exchanges, like the S&P 500. Similar to mutual funds, ETFs allow investors to own fractional ownership in a portfolio of stocks. For most investors, professionally-managed mutual funds and ETFs offer diversification and simplicity. They can be purchased through mutual fund and financial services companies. Often they're available through employer-sponsored retirement plans.

the nest