How To Invest In Shares of Common Stock

by Alexis A. on 2010-07-180

I used to think that investing simply meant that you gave your money to some stock broker who worked in an office with a really large name on the front (think Solomon Smith Barney) and that in thirty years, when I’m ready to retire, I would be rich. So, I put off making any kind of move toward saving for my eventual retirement other than a haphazard contribution to my 401(k) until I started making enough money that I could finally sock some away. Well, here I am, 36 years old and nothing to show for it except a $1,400 balance in my 401(k). How in the heck did I expect to retire by the time I was 60 without ever getting started? Sure, I’m going to get a pension, but how much is $1,200 a month going to buy me, 24 years from now?

Getting Started With Investing

So, I made the decision to take control of my financial future and start investing. The first thing that I discovered, thanks to those cute little babies on TV care of ETrade brokerage ads, was that I could learn to invest on my own with a little know how and a lot of motivation. You can learn more about the world of investing by perusing free tools and educational material from the best online brokers out there.

For a great list of brokers, check out our Best Brokerages section for some top choices.

Investing In Shares of Common Stock

Now as far as what to invest in, the first thing to check out is the most basic investing product available: the common stock.

First of all, the key to understanding how investing in shares of common stock helps you accomplish your investing goals is to understand what common stock actually is. Owning stock is basically like holding the deed to a room in your house. Each stock certificate gives the holder a percentage of ownership in the company. The more stock you own, the more of the company you control. Stockholders get a say so in the way a company is run based on their ability to vote. Each stock gives you one vote when it comes to deciding company policy and operating procedures. Obviously, the more stock you own, the more influential your vote is going to be.

Okay, so now you might be wondering how you can make money by buying and owning stock. The idea behind buying common stock is to pick companies that have a really good chance of doing well in the future. The reason that you want the company you select to do well financially year over year is that the better the company does, the higher its stock is valued on the market and the more someone has to pay in order to get it. One investing strategy involves stock market timing. You’ve probably heard of “buy low-sell high”: this refers to buying a stock at a low selling price and selling it as soon as it peaks in value. Those who participate in this activity may get to pocket the difference, if things work out as desired.

Trading Common Stock Shares: An Example

Let’s check out an example here:

Let’s say that I want to buy a share of stock in a company: Anderson Paperclips. I buy that stock at $1 per share. I hold on to that stock as I watch the market daily until Anderson Paperclips peaks 10 years later at $51 per share. I sell my stock and pocket the $50 in profit (minus the stockbroker commission) and go on a shopping spree with my newly acquired wealth (a better move would be to reinvest proceeds or save the funds for something more meaningful). Look out Housewives of Orange County, here I come!

Of course, the above example is an oversimplified illustration of how this whole thing works. The stock market, which is where common stocks are bought and sold, fluctuates daily with some stocks gaining ground while others losing some value. It’s pretty common to see stocks gain steadily for weeks, months and even years and then start losing value. It’s a highly volatile market such that one day can make the difference between being a multimillionaire and being homeless.

Stockbrokers around the globe will try to convince you that there is a secret, magical formula that only they know that will guide them to only pick the stocks that will make them money, but what I’ve discovered is that picking stocks is a lot like picking winning racehorses. There are favorites and long shots and no guarantees EVER that one stock will outperform any other stock on the market.

In order to be successful in investing in shares of common stock, you have to know the company you want to invest in intimately. You have to look at their past performance and measure it against how you think they’re going to be able to perform in the future. As Kenny Rogers once said, “you gotta know when to hold ‘em, know when to fold ‘em. Know when to walk away, and know when to run.” All of this comes with experience.

Common Stock Trading: Advice For Beginners

My advice when it comes to investing in common stock: patience and caution. Open a small investment account online. You can do this with a number of excellent discount brokers like Scottrade, TradeKing, OptionsHouse, and many many more (see our list of brokers above). Most of them have trading accounts that only require a small initial deposit…say around $500 to $1,000 or so.

Do some research, find out about the companies you want to invest in. See how they are doing now and how they’ve done in the past. Buy a stock or two and watch your investment grow. Above all, don’t panic if your stock loses a little value here and there. It’s bound to happen from time to time. If you notice that your stock begins a gradual but steady decline, decide on whether to stick it out with the stock or to let it go. Through careful analysis, make your own determination (as best as you can) about the plight of your stock: do you think it will rebound or will it tank? You want to be able to sell while you can still make a profit.

Even as you begin enjoying the process, do start slow and then start building your investment portfolio as you become more skilled and comfortable with this activity. Since your money is on the line, you want to be prudent with the course of action that you take. Good luck and happy investing!

Copyright © 2010 The Digerati Life. All Rights Reserved.

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