One of the many ways you can make money while still having a job is to invest in stocks. While this may sound simple enough, like most things there is more than meets the eye. There are various different types of stocks available. However, when we generally refer to stocks, we’re referring to what is called common stock.
Common stock works as follows: a person has a share in it, which in turn represents a share of ownership in a corporation. Stemming from this, if a person owns more shares, they will own a larger stake in the company.
Traders and investors tend to buy common stock shares with the aim of earning positive returns because of their investment. However, investing in common stock – or any stocks for that matter – can put your money at risk if the company performs poorly or ultimately becomes bankrupt.
5 Steps to Invest in Common Stock
1) Evaluate stock fundamentals
First things first, if you want to invest in common stock, you’ll need to evaluate stock fundamentals. A stock’s fundamentals are the factors that determine how much the stock is worth, which depends on how successful the business is.
To evaluate these, you’ll need to look at the price of the stock to the earnings of the company. This will show you how expensive it is per pound of earnings, which is known as the price to earnings ratio, or P/E ratio. To research and compare these investments, you will need to use a stock screener, such as Yahoo! Finance and TradingView.
2) Compare company fundamentals
While there’s no doubt that it’s important to evaluate stock fundamentals, you also need to decide which company your investment will go towards. You’ll need to compare key ratios (such as the P/E ratio) of companies who are competitors against an index that the stock is measured against (such as the S&P 500).
By doing so, you can gain insight as an investor into which companies are trading at a discount in comparison to their competitors. There’s no point in comparing stocks that don’t compete with each other, as different companies specialise in different fields and thus don’t compete. For example, it wouldn’t be effective to compare an insurance company with a supermarket chain.
3) Compare brokers
The next step is to find an online broker. A broker is a person or firm who helps others with their transactions, including investment in common stock. You may even wish to hire a full-service broker if you want professional help with choosing your investments.
However, just like finding a company to invest in, you need to compare brokers to find the one that is right for you. To do so, consider the following:
- Account minimum – When setting up an account (see step 4), some brokers won’t let you do this for free.
- Account fees – You may be charged annually for having your account, or even for inactivity.
- Commissions – You’ll need to pay your broker to buy and sell the stock you’re investing in.
- Support – If you’re having difficulty finding stock, you should check to see if your broker offers help. This can include basic communication such as contact via email or phone, but they may help you research stocks and provide you with educational tools.
- Bonuses – When setting up an account, some brokers will give new users cash bonuses.
Also, you should check to see if any of the brokers you’re comparing have received complaints; this will help you move closer to a decision.
4) Open a brokerage account
Once you’ve chosen a broker, you’ll need to set up an online account with them to plan, research and buy common stocks. As with most websites you sign up to, you’ll need to provide personal information. In this case, you’ll need the following:
- Driver’s licence or government-issued ID
- Your address
- Your date of birth (you can’t be under eighteen if you wish to invest in stocks on your own)
- Your annual income
- Your employment status
- Your National Insurance (NI) number
- Your net worth
5) Place your trade
By this point, you’re ready to do what you set out to do in the first place and place your trade in common stocks. Your broker will be the one carrying out what you want to do on your behalf once you’ve agreed on how much common stock you wish to purchase.
In the unlikely event that you’re trading alone, you’ll have the option of choosing between market or limit order. The former orders stock immediately, while the latter allows you to plan a target price below current trading levels to buy the stock.
To Sum Up…
Investing in stocks can be a worthwhile use of your time, energy and money, and learning about common stock is a great place to start. By evaluating stock fundamentals, company fundamentals and choosing the right broker to open an account with, you can ensure you will be making the most profitable bet for your investment.
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This was our guide on how to invest in common stocks. If you’d like to learn more about stocks and accounting, contact us at Count today.