Do you want to make money online from stocks without a broker? If YES, here’s a complete guide to investing in stocks for beginners with little money.
The stock market is a fascinating billion dollar international trading market. Traders buy and sell stocks and by so doing, they shape the financial world. Investing and profiting from the stock market can however be an arduous task. In addition to discipline and a sound understanding of the stock market, it also requires extensive research and perseverance, but with the right knowledge and continuous research, an investor can really reap a lot of profit from the stock market.
For a business to grow and succeed, capital is needed. When a company is about to start, the founder may use his personal savings, borrow or source for funds through other means in other to start his company. However, as the business improves and flourishes, the need arises to source for funds via other means. The additional funds may be needed to increase production, open a new office or hire additional staff. The company can then decide to borrow money or sell to investors a share of the company.
Table of Content
- What is a Stock or Share?
- Investing in Stocks – Types of Stocks
- Investing Through the Primary Market Vs Secondary Stock Market
- What is the Primary Market?
- What is the Secondary Market?
- Differences Between the Primary and Secondary Stock Market
- Investing in Stocks – How to Choose a Company to Buy From
- Is It Possible to Buy Stocks Online Without a Broker
- What is the Minimum Amount That Can be Invested in Stocks?
- Strategies for Investing in Stocks for Beginners
A stock, also known as a share, equity or equity stock is therefore a unit of ownership of a company. Not just any company, but a public company. This means that a certain percentage of its ownership is in the hands of the public and anyone can buy part of it and become a shareholder, stockholder or shareowner.
When you become a stockholder of a company, you now own a part of the company’s assets and earnings no matter how small. About half of the all Americans (52%) own a stock in one company or the other according to a poll conducted by Gallup in 2016.
Investing in Stocks – Types of Stocks
There are two main types of stock that are issued by companies. They are common and preferred stock.
a. Common Stock
More often than not, when people say “stock”, they are actually referring to common stock. Most stocks that are issued are common stocks. Common stock is a security that represents ownership of a company. People who own common stocks of a company are entitled to profits in the form of dividends and also have voting rights.
Typically, to elect board members, the investors are entitled to 1 vote per stock owned. The dividends that are paid to common shareholders largely depends on the profits or loss that was made by the company. In the event that a company suffers bankruptcy and has to be liquidated, the common shareholders are usually in the bottom of the priority scale of those that will get their investments.
b. Preferred Stock
This type of stock can be likened to a bond. Here, investors get a fixed dividend for as long as they hold the share irrespective of the profit or loss sustained by the company. Also, individuals who own this type of stock are not entitled have to voting rights. In the event of the liquidation of a company, and the assets are sold off, the preferred stock holders are ranked higher in the priority scale when they are to be paid.
Investing Through the Primary Market Vs Secondary Stock Market
The financial market, unlike any other market in the world provides a platform where new securities are sold to members of the general public on a regular basis. A security is a financial instrument that holds a value (in monetary terms) and maybe sold.
Furthermore, it represents the rights to an ownership position in a public traded corporation by way of stocks, bonds and options. Financial products are bought and sold at the capital market and these financial products are broadly classified into the primary and secondary stock market.
A good knowledge of what the primary and secondary market is and how they function is very important for an investor in other for him/her to comprehend the stocks trade. Without the aforementioned knowledge, the stock market would be more problematic to discern and won’t even be as profitable. With this in mind, it is pertinent that before an individual invests his savings in the financial market, he/she must know the difference between the primary and secondary market.
What is the Primary Market?
The primary market or the new issues market (NIM) is basically where stocks are created. When a company corporation decides to go public for the first time by raising an Initial Public Offering (IPO), it is done in the primary market.
Here, the company sells its share to the investors through an investment bank or a finance syndicate of securities dealers known as underwriters. Funds can also be raised by the government and other public sector institutions through the issuing of bonds.
The issues that a corporation makes can also take the form of Bonus issue, right issue, offer for sale, public issue etc. In the primary market, capital and equity can be generated through any of the following means:
- Preferential Allotment
Like the name implies, preferential allotment involves allotting securities or shares on a preferential basis. When a company needs to raise fund to settle its debt or expand its existing business, issuing securities to the general public may not always be feasible because it costs a lot of time and money. The company may then decide to sell to a small group of select individuals or companies who are interested, thereby reducing the paperwork and man hour that selling to the public involves.
- Private Placement
When a company needs to raise money, they can do it in the private market as opposed to the public market. The private market affords them the advantage of obtaining the fund they need faster and also helps them to avoid certain fees. If they raise the money privately, they can avoid having to register the sureties and also avoid having to file a prospectus.
By avoiding the aforementioned, they are able to get capital from investors into the coffers of the company at a much faster rate than would have been possible had it been raised publicly. This is the idea behind private placement. A private placement is therefore a means of raising capital that involves offering up for sale unregistered sureties to a particular number of investors. Warrants otherwise known as bonds and shares of stock of the company are exchanged for cash.
In the of America, even though all placements must adhere to the securities act of 1993, the securities that are offered in a private placement do not have to be registered with the Securities and Exchange Commission. However, the issuance of securities must be in line with an exemption from registration as stated in the securities act of 1993.
- Public Issue
This basically involves selling securities to the public at large. Issuing stocks publicly allows members of the general public to own a part of the company; however, they won’t be able to own a controlling factor. A public share can be an initial public offer (IPO) or a further public offer (FPO).
- Rights Issue
This is an invitation to present shareholders to purchase more shares in a company at a price lower than the market price but on a future date. Here the securities are known as rights. Pending the date for the maturation of the rights, a shareholder can decide to sell his/her right in the same way a person would sell an ordinary share.
What is the Secondary Market?
The secondary market also known as the Aftermarket is basically where stocks are traded. It is a financial market where financial instruments such as bonds, stocks, options and futures which were issued in the primary market are sold amongst investors. Here an investor buys securities from another investor as opposed to purchasing directly from the issuer.
The secondary market is divided into 2 kinds of market.
- Auction Market
This is a centralized and organized exchange where buyers and sellers (or their representatives) meet at a place and announce the rate at which they are willing to sell or buy securities. The buyers and seller “bid” or “ask” prices. Every price is announced publicly and investors who wish to buy shares can easily make their choices. Examples of auction markets include the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) etc.
- Dealer Market
In this market, there is no central location for interested parties to meet each other, rather, the buying and selling of securities occurs through telephone, custom order machines, computers etc as opposed to an actual trading floor. The sellers make their offer through the aforementioned electronic methods while dealers then relay the information to the buyers.
The dealers earn their profit by selling securities in their inventory. National Association of Securities Dealers Automated Quotations System (NASDAQ) is a good example of the dealers market. Over the counter (OTC) market is a variation of the dealers market.
Differences Between the Primary and Secondary Stock Market
From what we have discussed above, it is quite obvious that the primary and secondary markets are not the same in any way. The differences between them are as follows:
- In the primary market, the seller of a security is also the issuer of the security while in the secondary market, the seller of the security is the person who holds the security and is willing to offer it up for sale.
- In the primary market, companies are supplied with funds that they need for the settlement of debt and running or improving their businesses, whereas in the secondary market, the companies are not provided with fund.
- Primary issuing of securities is not a constant process and as such it does not occur regularly in the primary market, while secondary issuing of securities occurs on a frequent basis.
- In the primary market, a security can only be sold once by the company but in the secondary market, a security can be sold and resold multiple times.
- Primary securities do not always exist previously in the market until the point of initial public offering. Secondary securities on the other hand are outstanding.
- Buying and selling of shares in the primary market is between a company and the investors while in the secondary market, it is between investors.
- In the event of a change in price, the original issuer (the company) will not be affected in the primary market, while in the secondary market; investors will be affected for the better or worse if the price changes.
- The intermediary that exists in the primary market is the underwriter who then sells to the general public. In the secondary market, brokers act as intermediaries.
- In the primary market, the price of shares are fixed and constant, in the secondary market however, the prices of shares are subject to the laws of demand and supply and as such they have the tendency to fluctuate in price.
- The primary market is not a place per say. That is, it is does not have a specific location while secondary markets has a physical existence.
Investing in Stocks – How to Choose a Company to Buy From
Before you buy the stock of any company, it is pertinent to do a thorough research of the company. You will have to study the company’s income statement and balance sheet while keeping the following parameters in mind:
- Equity: The number of the company’s equity should be considerably higher than its value in the preceding year.
- Sales: The current year’s sales should be higher than that in the last year.
- Debt: The amount that the company owns as debt should be lesser or of the same value as that of the last years. Furthermore, the debt of the company should be lower than its assets.
- Earning: The amount earned by the company should be higher by at least 10 percent than that of the previous year.
Also, the following financial ratios should be considered as they will indicate if a company is financially strong, worth investing in and if it will generate profit for investors:
- Price-to-earnings ratio (P/E): this ratio represents the company’s stock price to its earnings per share. The number tells you how many years worth of profit you are paying for a stock. The lower the price to earnings ratio, the better. For example, a P/E ratio of 20 implies that investors are willing to pay $20 for every dollar of the company’s earnings. For the stock of large companies, the ratio should not exceed 20. However, for all kinds of stocks their P/E value should not exceed 30.
- Return on equity (ROE): this ratio measures the efficiency of a company at making profit from the funds that were invested in it. For a company that is worth investing in, the ROE should be increasing by not less than 10 percent in each year.
- Price-to-sales ratio (PSR): this ratio shows the value that is paid per dollar in the sale per year. The lower the PSR value, the better for investment. This ratio should be as close to 1 as is possible.
- Earnings growth: this represents the rate of growth of earnings from investments in each year. It should be 10 percent higher than its value in the previous year and this trend should be sustained over some years.
Is It Possible to Buy Stocks Online Without a Broker
In the of America, purchasing the stocks of a company is a fairly easy process. You can either purchase it from a stockbroker, who is licensed to buy stocks on your behalf or you can buy the stocks from an online broker.
In recent times, online brokers have become quite popular, owing to the low cost and ease of opening and operating an account. To buy stocks from an online broker, all you need to do is to head over to their website, sign up and transfer funds to their account.
Once the funds you transferred have been confirmed by the online brokers, you can then place an order. If you already have a stock in mind, you can navigate the website and make the purchase. Alternatively, if you don’t have any stock in mind but you have a general picture of the ideal stock you want to buy, you can use the filter option. Examples of online brokers are E*trade, Optionshouse etc.
The full service brokers on the other hand are brokers who you can meet on a face to face basis. They offer analysis of a customer’s personal and financial status and from the result they gather, they are able to offer a customized financial plan that is best suited for a particular client. Full service brokers are more expensive due to the additional services they offer.
What is the Minimum Amount That Can be Invested in Stocks?
A lot of people have the disposition that the stock market is for people who have a lot of cash to invest. This however is far from the truth. You can start with a small amount and then build on it to generate a far greater reward than you would have realized if you had left it in your bank (considering that banks’ interest rate is next to zero). The amount you can invest in stock to a large extent depends on the type of broker you choose.
Typically, full service brokers require a minimum of $5,000 to $12,000 as an individual’s starting capital. They also charge higher transaction fees. Some online brokers on the other hand charge as low as $500 or even less to start an account. Granted, an initial investment of $500 will take longer to yield several thousand as compared to $5,000, yet with concrete research and the right investments, profit can be achieved from a small sum.
Strategies for Investing in Stocks for Beginners
There are various methods by which someone can invest in stock, but the two most popular methods are the buy and hold strategy and the short-term speculation.
- The Buy and Hold Strategy
This is a long term approach to stock investment. Majority of investors and traders make use of the buy and hold strategy, owing partly to the fact that it is less technical and needs less time to study the vagaries of the stock market. After an investor has carried out his extensive research which leads him to believe that a particular stock will yield a lot of dividends in the long run, he or she can buy the share and hold it for a long period of time irrespective of the day to day fluctuations of the market.
Stocks that are bought and held for a long period of time have the advantage of being taxed lower as compared to short term investments. This strategy is best used for investing in companies that have a solid base as opposed to newer companies that pose a higher risk.
Even though this strategy may give the appearance of being a safe method of investing, in reality no strategy is entirely safe. Sometimes, big corporations make very little profit. Also, in the case of market decline as was the case in 1987, 2002, and 2008, the buy and hold investor will have to wait for a very long period of time in other to recoup his initial investments. Also, the buy and hold investor will not be able to take advantage of the price swings that short term speculators benefit from in other to make profits.
2. Short-term Speculation
This can take the form of day trading or swing trading. It involves buying stocks when they are low in price and selling them off when the price peaks. A swing trade is usually held for 2 to several days while a day trade is just for a day.
Here the main concern is the day to day fluctuations of a stock rather than its value on the long term. For short-term speculation to be profitable it should involve studying of charts statistics, financial reports and industry forecast of the stock so as to form an analytical prediction of its movement.
Knowing when to buy and when to sell to make the maximum profit is a major concern in short term speculation, yet, it does not really require a perfect timing. Consistent earnings from short term speculation irrespective of how small the returns are, can be compounded over a period of time to become bigger with time.
Short-term speculation has the advantage of higher anticipated returns in a short amount of time as opposed to the buy and hold strategy. Also, the short-term speculator can simply exit the market before or when it goes downhill.
Irrespective of the strategy you are adopting for investing in stocks, it is of utmost importance to keep an eye on your stocks so as to know when to sell them off should they not be increasing in value or if the economy has changed considerably.
In addition to that, you should also sell off stocks that you intended to hold if you know that the company will go bankrupt, if the company does something that goes against your personal beliefs system or if the Chief Financial Officer (CFO) is indicted of accounting problems or theft.
7 Tips for Investing in Stocks Profitably
Although there are no sure formulas that guarantee success while investing in stocks, here are a few tips that can greatly increase your chances of picking the right stocks.
- Determine your Risk Tolerance
Before you purchase any stock, you will have to ask yourself, “can I lose money?” That is, do you feel comfortable losing money? This doesn’t mean that you like losing money, but rather is seeks to uncover if you are the type of person that cannot withstand a loss or if you take one.
The stock market can be a scary place and some people have been known to commit suicide over a share that went down. So before you even think of buying a share, you should be aware of the risks; you could lose everything you invested (even though the chance of this happening is slim).
2. Have the Proper Expectation: Before buying stocks, you should have in mind that it isn’t a get rich quick venture. Investing in stock takes time to get profitable especially if you are buying and holding.
3. Be Willing to Put in Effort: Stocks should not be viewed as an investment where you throw in money and then it grows magically. You should be willing to do research on companies, look for new investment ideas, search through financials and records etc.
4. Don’t just invest in stocks alone but also learn to invest in a business you understand. If you don’t understand what a company does and how its business operates, then their stocks is most likely not for you.
5. Don’t Follow the Herd: Don’t let your singular criteria for buying a stock to be that a friend or family member is buying it or that they made profits from the stock previously. This strategy is bound to backfire in the long run. Also, beware of free and unsolicited stock picks that promise outrageous returns in a short amount of time.
6. Even though the saying that past performance is no guarantee for future results is a popular one, it should however be taken with a grain of salt. Past performances can to a large extent show you how a company will perform in the future especially if the company is being managed by the same set of people. If in the past a company’s managers have showed consistency in entering into new business and profiting from them then you should keep this in mind when valuing the firm.
7. Once you have bought a share, you will have to be patient. The stocks may not go up very fast so you will have to be tolerant and patient.