How to Invest in Common Stocks

Common stocks are the fuel for public corporation growth. Because each share represents a piece of the company’s ownership, buying a share represents your belief that this company is going to rise in value. As more people ask to purchase shares, current owners are able to raise the price they demand for their shares, increasing the market value of the company. Buying common stocks isn’t difficult once you’ve defined your goal and reviewed a few basic steps. Soon you’ll be the proud owner of your favorite company, hopefully one that’s quickly rising in value.

Step 1

List stocks you admire. Stock market wizard Peter Lynch advocated a strategy of “buy what you know.” Wealthy investor Warren Buffett prefers to only purchase shares in companies he understands to be fundamentally great operations. By starting your quest for common stock with a list of stocks you believe may be great, your chances of understanding your investments is much higher than if you try to buy a hot stock outside of your score of knowledge.

Step 2

Learn to evaluate stock fundamentals. Use websites like Yahoo! Finance stock screener or the MSN Money tools page to research your investments. Focus on company profits and revenues as an indicator of a healthy operation. Compare the price of the stock to the earnings of the company, to see how expensive your stock is per dollar of earnings. This ratio is called the price to earnings, or P/E, ratio and is used by investors to compare companies.

Step 3

Compare company fundamentals and review the charts for each company on your list. By comparing a company’s key ratios, such as the P/E ratio, against other companies that are competitors and against an index the stock is measured against, such as the S&P 500, investors can gain insight into which company is trading at a discount to its competitors. Don’t compare stocks that don’t compete with each other. Technology company P/E ratios are very high because investors are betting these stocks will come up with a new technology, while a regional water utility may have a very low P/E ratio.

Step 4

Open a brokerage account. Trade online if you wish to plan, research, and buy common stocks alone. Online company fees are discounted heavily when compared to full-service brokers. You may wish to hire a full-service broker if you’d prefer a professional to help you pick investments. Check to see if a prospective broker has had complaints before hiring him at the Financial Industry Regulatory Authority website.

Step 5

Place your trade. If you use a full-service broker to help you trade, they’ll push the buttons on your behalf after you agree on how much of each common stock to purchase. If trading alone, you’ll choose between a market or limit order. Market orders purchase a stock immediately, while limit orders allow you to plan a target price below current trading levels to buy the stock. If shares in the common stock plummet to your prearranged price, you’ll buy the stock.

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