Buying Stocks

Now that we've picked our on-line broker and we're aware of our other money gardens, it's time to take the plunge and buy some stocks.

But which ones?

With over 15,000 stocks listed and more coming everyday, how can one possibly know which ones to buy?


Maybe you're reading some of the "hot sheets" (Barrons, The Street, Standard & Poors, Investors Daily, etc etc) and you have a few that you're considering already.

Before you buy a single stock you should consider the question: Am I an investor or am I a trader?

An investor is someone who is looking to buy stocks for investing, that is, to sock away money and let it grow over a long period of time, like a savings account.

A trader is someone who is looking to jump from one stock to another, looking for that great deal that's going to make some fast money. In fact a day trader is someone who might buy a handful of shares one hour and possibly sell them the next, sometimes it goes that fast.

If you're going to be a trader and your new at this, here's a guarantee: You're going to lose a lot of money, fast. You might want to consider the Lottery instead, you're chances are about the same.

Day traders are usually players who have been in the game a long time, maybe even someone whos actually worked as a stock broker or money manager.

In fact broker houses have certain requirements to even be a daytrader: The house we use, TDAmeritrade, requires a $25,000 account and registering with them as a day trader, else youre only allowed 3 day trades in a 90 day period!

If youre new at this, day trading is not for you, at least right now.

But after saying that, since you are new at this, you might indeed buy a stock, sit on it a few days and change your mind. You're in the learning curve and right now, that's ok. In fact, that's one reason why some brokers give you 30 or 60 days before they start charging their per transaction fees.

Some of this depends on how much time you have to actually sit in front of the keyboard and buy stocks. If you have a full time job and you're not able to keep a close eye on your stock activity, you might want to consider going straight to the big "Blue Chip" stocks, those stocks that are a little more stable.

Another consideration is dividends. Some stocks pay their investors back money for their investments, in addition to the actual profits or gains from stock growth in the market. It sounds like a good idea, and it is actually, but some stocks don't pay dividends and that's fine, too.

I know a few folks who have been doing this a long, long time and now they live on their dividends as their regualr "income." Sweet.

Let's consider buying your first stocks.

If you google "blue chip stocks," you'll probably come up with a list that might be a good start for a beginning investor.

Stocks like Dupont (DD), 3M (MMM), Honeywell (HON), IBM (IBM), Microsoft (MSFT), even McDonalds (MCD) are just examples of stocks that aren't going to disappear overnight. The list is long and your choice is your own. But its a good place to start.

In choosing a stock, we're primarily interested in a few things: Growth and profitability.

Get to know your broker's research tools. TDAmeritrade has an excellent research and resource web site but it's certainly not the only one. Yahoo Finance is also a good resource. And here's a good rule: Check out the charts!

Reading charts (and this takes time) is probably the most important factor in considering a company's growth potential. There are charts for the last day, the last week, the last month, the last 3 and last 6 months, the YTD (Year to Date), the last years, the last 3 years, the last 5 years, the last 10 and even the last 20 years growth. Whew!

Study and get to know these charts well. If you can read a company's chart accurately, you will get a good sense of where that company's going.

There are other factors as well to become acquainted with in choosing the right stock. How many stocks does the company have for sell? A billion shares at $25 a share is probably not equal to a company that has a million shares (or less) at the same value!

A company's "Valuation" is something you should read and learn as much as possible. Do your homework! Learning about a company's P/E ratio and other factors all help veteran stock buyers make a better decision...usually.

Not all the time, but usually.

For now, a general good rule to follow as we assume you're still a beginner, is to choose a stock whos chart suggests their on the "upswing" and have been around awhile, especially the bigger Blue Chip Stocks.

Finally, a word about diversity. Buying all restauraunt stocks or all utility stocks or all high tech stocks is not advisable. If one group of stocks all go down together (and they often do), you want stocks in another group to stabilize your losses.

Pick a food/restaurant stock (for example MCD, YUM, SBUX, etc), then a utility (SO, BIP, ETR, etc) then a generally diverse company (DD, HON, MMM), then a high tech or science (MSFT, GOOG, AAPL, ILMN, etc), and so on and so forth, with the idea of becoming more well rounded, more diverse in your choices.

Jim Cramer has an excellent segement on his "Mad Money" Show called "Am I Diverse?" where he examines a caller's stocks and lets them know if they're well rounded enough. Look for it and consider why this is important.

A lot to think about, yes. Remember, buying stock is easy to do, but it takes a lifetime to master.

Good luck!