Sunday, 21 September 2014

Buying a Stock 101...

Buying a stock 101.

Often time people contemplate investment and the first thing they will say is “I don’t have the money to buy stocks”. Buying stock is really not difficult. It is no different from going to the supermarket to pick up a basket of grocery. Each item in that basket of grocery has or serves different purposes and will add different value to your life.

Your first stop in buying a stock is at the stock brokerage house where you will speak to a stock broker and open a brokerage account to which you will place a sum funds. You can pick the stock of a company that is listed on a stock market like the New York Stock Exchange (NYSE), London Stock Exchange (LSE) or the Jamaica Stock Exchange (JSE).

There is a small brokerage commission associated with the purchasing and selling a stock and this fee generally ranges from 1% - 2% plus other related cess which may not be more than 100 basis points, hence your total purchasing/selling cost in addition to the unit price of each share. You would know the total cost prior to the purchase order being placed in the stock market. The transaction activity is a market action beit sell action or purchase action on the stock exchange.

If and when the order is executed your broker will inform you and the total number of shares is reflected in your account. The words stocks and shares are used interchangeably to mean one and the same.

So now you are in the market with your first item (stock) in the basket. Remember that in the same way you went about evaluating the grocery item you purchased at the supermarket, it is the same way you would evaluate a stock. You may have to do some research on the company or on the stock. And I say both company and stock because a good company may not necessarily be a good stock. By that I mean, a company may have a certain asset valuation on its balance sheet, but the market capitalization of it at outstanding shares may be valued less or more than its asset valuation. This asset value of the company also called the company’s book value. Ideally, you should want to buy a stock at a price below the company’s book value.

As I said in the last blog, you must firstly start off with a company that is making a profit and the second thing is to make sure that the price you pay for the stock/share is below book value and has low price to earnings ratio. You will see price to earnings ratio represented as P/E ratio.

Go open a brokerage account and start the process, and wet your feet in owning a piece of a company. Next time will share something on value investing with you.

But I can’t finish this blog without giving you a dose of Warren Buffett:

Who better to copy than Warren Buffett?

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Ask questions and make comments pleeeeease.