Buying Stocks: How The Stock Market Works

Listen to our podcast episode on this topic, “What are stocks and how are they purchased?”

Buying stocks allows an investor to hold an ownership claim in a company. There are a number of different ways to buy into the market. However, it’s important to research the companies and stocks on offer before jumping in, as well as identify the amount of risk you’re willing to assume.

When buying stocks an investor is acquiring a financial security that gives the holder an ownership claim in a company. It also gives the holder the right to receive dividends and a vote at the company’s annual meeting. There are multiple factors that affect share value including market sentiment, the company’s earnings performance, the general economic climate and technical factors. However, in a general sense, the price of a stock is determined by the relationship between supply and demand in the market, and the investor’s goal is to satisfy the cliché expression of, “buy low, sell high.”

Buying Stocks

There are several ways investors can buy into the markets. Here are some of the most common.

Discount Brokers: This is generally an online service and is the most common medium for stock investors. It’s also the cheapest option and costs are often processed per transaction. Investors are generally not given advice or help other than manipulating the actual site.

Using the services of an investment representative: These people are often called stockbrokers or brokers, and are licensed to give investment advice as well as to buy and sell securities.

The main categories of services include Portfolio Managers. Typically, these representatives deal with higher-income clients and make transactions on their behalf after detailed analysis and reporting as part of an overall investment portfolio.

Service Brokers provide a platform for the investor to buy and sell stock with additional features such as advice based on financial status and risk tolerance in exchange for a commission.

Choosing a Stock

In order to begin the process of choosing an actual stock, the key to success is research. Start by identifying an interesting industry and make a habit of reading business and financial news, including specialized business sections such as The Financial Post. Pay particular attention to the company’s quarterly earnings reports and its history of raising dividends.

It also helps to follow general economic trends such as employment, economic growth and interest rates.

Once several companies that interest the investor have been identified, the next step should be to perform an analysis of the companies in question. Explore the company’s website and read as much news about the firm and the sector as possible.

You can also determine the company’s financial health by reviewing their financial statements, a series of documents that portray a past and current snapshot of the firm’s financial standing. Additional indicators of financial health include the amount of debt a company has, the rate at which revenue increases relative to costs (margins), and the frequency and amount of dividend payments. Read analyst reviews of those companies and continually monitor the activity of the chosen companies, their competitors, and their respective industries.

The investor also needs to identify the amount of risk he or she is willing to assume and categorize and filter each stock under consideration based on that finding.

Some Final Thoughts

The stock market can be very lucrative, but an investor should be wary of many factors that can negatively influence their investment. Low prices, market excitement and biased analysts can all make certain stocks seem valuable, which emphasizes the importance of continued research and monitoring. Additionally, the stock market is more volatile than other types of investment, so an investor should try to identify trends as opposed to specific price movements. As they say, ‘the trend is your friend.’

Finally, and most importantly, don’t forget to buy low and sell high!

6 years ago