How to Invest in Stocks in 2020

You may have heard a lot about a company and be keen to invest in it, but where do you start?

Thanks to online stock brokers, buying and selling stocks online has never been easier. However, for beginners, it may be a confusing process.

If you’ve never bought a stock before, it can be difficult to know where to start and what to look out for when buying shares online.

This step-by-step guide will explain how to buy stocks for beginners and allow you to start buying and selling stocks easily.

We will also explain when to buy a stock, where to buy it, and how to get the most out of your online stock purchase.

Want to buy stocks now?

Follow our quick guide below if you are ready to buy stocks today.

How to buy stocks online: beginner-friendly tutorial

In this day and age, buying stocks is easily done through an online stockbroker.

An online stock broker acts as the middleman between buyers and sellers of stocks, bonds, ETFs, and other investment securities.

The share or investment broker is paid a broker commission and makes money on the spread between the bid and ask price of a stock.

It is also now widespread for online brokers to offer stock trading apps allowing you to invest in stocks from your smartphone.

Opening a stockbroker account is a quick process that takes no more than 5 minutes. The stockbroker you choose will require a few details from you, such as proof of identification and your details.

You will then have to fund your account and from then, buying the stock of your choice is straightforward. If you are interested in stocks with a high upside potential even with small investment amounts, you should consider trading penny stocks as well.

We have illustrated below a quick step-by-step to buying stocks through one of our recommended stockbrokers, Ally Invest.

Step 1: Open your stock broker account

Firstly, open your account with Ally Invest by clicking here. You will then be asked to fill in your basic account information and answer brief questions about your income and risk tolerance.

Step 2: Fund your stock trading account

After registration, the stockbroker of your choice will typically require you to fund your account to buy stocks, including giants such as Amazon and Google.

Your Ally Invest account can be funded directly from your bank account, which makes it easy and straightforward. All you have to do is select the bank and login to authorize the sale.

Step 3: Select the stock you want to buy

It is now time to select the stock you want to buy.

If you have a stock in mind, it should make the process much easier. Most investment brokers will have a search function where you can enter the stock name and make your purchase.

If you’re not yet sure about which stock you want to buy, we recommend that you look for a broker with a good range of analytical tools and data. Analyzing the stock markets will help you to spot opportunities and make a wise investment.

We recommend a stockbroker with a good set of educational tools, as this may help you to understand what makes a stock a strong buy. Ally Invest provides company quarterly/ annual financial reports, also known as SEC filings on the most extensive stocks, which are a good indication of the up and coming stocks that could generate high returns.

When you’ve selected the stock of your choice, simply click on “Buy” and follow the next step. Don’t worry – your account won’t be debited yet.

Step 4: Decide on the number of stocks you want to purchase and your order type

Your Ally Invest trading screen will then display the Bid and Ask price.

The bid price is the highest price that a buyer is willing to pay for that stock. The ask price is the price that sellers are willing to take for it. If you are selling a stock, you are going to get the bid price, if you are buying a stock you are going to get the ask price. The difference (or “spread”) goes to the broker/specialist that handles the transaction.

Choose whether you want to buy or sell the stock, the type of order and the number of shares you want to buy then move on to step 5.

Step 5: Place your order

You must then click on “Preview order” and confirm. Your buy order will then be executed and you should now hold the shares in your stock trading account.

How to Buy Stocks For Cheap

If you’re worried about commissions, rest assured – many sites offer stock trading with very low fees starting at $0. The following 5 stock brokers are reputable sites where you can buy stocks for cheap.

How to Buy Stocks with Credit Card

Generally speaking, most stock brokers will not allow you to purchase stock using a credit card.

As you know, to buy and invest in stocks easily, stock market investors tend to go through online stock brokers.

During account opening and funding, you will be able to fund your stock trading account through an initial deposit. This is generally in the form of a bank transfer.

Therefore, you can absolutely buy stocks with a debit card, but most brokers will not allow credit card purchases when it comes to buying stocks.

The reason most brokers won’t allow this is because there are policies in place in order to protect investors from investing more than they can afford.

Buying stocks with a credit card can also hurt your credit score, which can take years to recuperate.

However, if you are desperate to buy stocks with a credit card, there are a few loopholes you can explore. These options are:

• • Discount stocks – Some brokers offer to purchase discounted stocks with a credit card. Although it sounds appealing, it might be risky as you trade on margin.
  • Get a cash advance to purchase shares – Online brokers also offer cash advance if you buy stocks with a credit card. You get a loan from the broker with a specific date you must pay back the loan.
  • Balance transfer cards – A balance transfer card allows you to transfer high-interest debt from one credit card to another card with a lower interest rate. Once you can approve you have a balance transfer card, you can avoid the high-interest rates charged by brokers.

  The disadvantages of buying stocks with credit card

  • Fees – In general, credit card fees are high. Online brokers charge additional high fees for deposits and withdrawals through credit cards.
  • Interest – If you have a credit card debt, you will eventually have to pay high rates for the credit card issuer.
  • Risk – If you trade with a credit card, you borrow funds from your account. That might be extremely risky as you can end up owing money to your bank. If you do, use stop loss and limit order to avoid debt in your trading account.

Should I invest in stocks?

There are good reasons to invest in stocks, but hedge funds are returning 10–15% annually, so why not invest in hedge funds instead?

Stocks are an attractive investment because, among all investment securities, stocks have the best risk-return trade-off.

An investor who takes higher risk expects to be rewarded with higher returns whereas lower-risk investments have lower potential returns. Both stocks and hedge funds have historically delivered around 10 percent returns but the stock investor takes the much lower risk for every $1 of returns.

While both investments earn 10 percent returns, the hedge fund has a beta* of 5 versus 1 for stocks.

Asset Beta 10-year Return

• Hedge Funds 5.00 10–15%
  Stocks 1.00 10.5%
  Bonds 1.00 2.7%

Simply put, stocks have the best risk-return trade-off among investment choices. This makes stocks one of the best investments.

*Beta is a measure of price volatility. The market beta is one. Hedge funds are 5 times more volatile than the overall market.

How to identify a good stock to buy

If you’re interested in buying stocks, but you are wondering which stock to buy, we strongly recommend good old-fashioned stock analysis.

Buying stocks on a hunch or gut instinct is likely to turn into a money-losing investment venture. The best way to find strong buys is by conducting fundamental stock analysis, analyzing the following 14 criteria.

When to buy a stock

That is ‘the question’. There are many factors to consider before you purchase a particular stock. For example, the timing of buying a stock depends on your investment/trading strategy.

There are four trading/investment strategies: long-term trading, swing, day-trading, and scalp trading.

If you are a long-term investor, the exact time is not as important as a scalp trader, which must take into consideration small price fluctuations. So, before you start trading, you should identify your trading/investing strategy.

Other factors to consider before you buy a stock:

• Economic data – Economic data releases such as Gross Domestic Product (GDP), CPI, interest rates announcement, etc., can affect market sentiment and companies’ earnings.
• Company earnings report – Every public company report a quarterly earnings report which includes net income, earnings per share (EPS), forecast, and net sales
• Company dividends –  A company can pay its shareholders a dividend if a profit has been made. As a result, the stock’s price will change.
• Technical analysis – Technical analysis is a trading method to evaluate financial instruments’ prices and identify trading opportunities based on charts and technical indicators.
• Stock’s market volume – Every stock has a volume, which represents the number of traded shares during a specific period.

When to sell a stock

While buying a stock is the easy part of a transaction, selling a stock is more difficult as it triggers an emotional reaction.

When you sell a stock, in profit or loss, you take a hard decision, and usually, even when you sell the stock in profit, you might be disappointed. That is a significant part of trading.

Easy said than done, but here are two tips for selling a stock at the right time that might help you:

• When the trend goes against you, sell the stock.
• When the tend goes with you, hold it until the trend changes.

Other factors to consider before you sell a stock:

• Company’s financial status
• Economic slowdown
• Company’s reports
• Seasonality in the stock market

Top 10 stocks to buy in 2020

Well, some companies are immune to financial crises and economic slowdown more than others.

The following stocks are blue-chip companies with high market-cap, solid revenues, and a stable income.

How much capital do I need to start investing in stocks?

Fractional shares have significantly lowered the minimum investment amount. A fractional share is one share divided into smaller components or fractions.

These fractions are sold as separate securities. ETFs have also lowered minimum investments. Because they pool investor funds and do not have high management fees, the issuer can set any amount minimum to invest in a fund.

This means that although online broker minimum deposits vary, you don’t need to have a large amount of capital to start investing in stocks. You can invest in stocks on Robinhood with as little as $5 and in M1 Finance with just $10.

Premium brokers, on the other hand, may require that you have not only a high minimum account balance but also meet an asset test (e.g., minimum assets of $25,000).

How much money can I make from stocks?

Although past performance is never a guarantee of future performance, the historical performance of a security can be, but is not always, a reliable predictor of future performance.

A stock with low volatility (a large-cap value stock) is more likely to replicate past performance than a stock with high price volatility (a small-cap growth stock).

The S&P 500 index provides a good benchmark for a diversified stock portfolio. As mentioned, since 1957, the S&P 500 has earned an annual average return of 10 percent. This means that if you invest $10,000 in the S&P 500 index, you can potentially earn $1,000 per year.

More predictable is the dividend payments a stock will pay. Dividends are the regular distribution of the profits of a company to stock traders. Dividends may be paid out monthly, quarterly, or biannually.

The investor may accept cash dividend payments or reinvest dividends and benefit from the power of compound annual returns. Companies with steadily increasing and reliable dividend payments have historically outperformed the market.

Centrica (CNA), a British utility company, is one of the highest dividend yield stocks.

It pays semi-annual dividends at 8.65%. Another example is Marks & Spencer Group (MKS), which pays semi-annual dividends with a dividend yield of 5.96%. This means that if you invest $10,000, you could be earning up to $596 twice a year.

How much will I get taxed buying stocks?

If you hold a stock for more than a year, you will be liable to pay capital gains tax. Capital gains are the profit you make from the sale of investments, such as stocks and real estate. Your tax bracket determines the amount you will pay.

Stock tax varies a lot from country to country. An example is Sweden where you pay 30% – Finanso.se 

Pros of investing in stocks

Stocks are the most traded investment security for a number of reasons.

Cons of investing in stocks

The biggest risk an investor faces when investing in the stock market is the loss of capital.

Also called investment risk, it is the risk the price of a security will fall, and you will have to sell it at a lower price than what you paid for it.

The best way to manage the loss of capital risk is to manage risks prudently. The following are major stock investing risks and how to evaluate them:

Glossary of Investment Terms

Bonds

A bond is a loan made to an organization or government with the guarantee that the borrower will pay back the loan plus interest upon the maturity of the loan term. It can be advanced to the national government, corporate institutions, and city administration. It is an investment class with a fixed income and a predetermined loan term.

Mutual Fund

A mutual fund is a professionally managed investment vehicle that pools together funds from numerous investors and invests it in such securities as stocks, bonds, and other money market instruments. They are headed by portfolio managers who determine where to invest these funds. They are highly regulated and invest in relatively low-risk money markets and in turn post lower rates than other aggressive managed funds.

P2P Lending

Peer-to-peer lending (p2p lending) is a form of direct-lending that involves one advancing cash to individuals and institutions online. A P2P lending platform, on the other hand, is an online platform connecting individual lenders to borrowers.

Bitcoin

Bitcoin is the legacy cryptocurrency developed on the Bitcoin Blockchain technology. It is a new form of money primarily developed to solve some of the inherent challenges associated with fiat currencies like inflation and over-production. It is virtual (online) cash that you can use to pay for products and services from bitcoin-friendly stores.

Index Funds

An index fund refers to the coming together of individuals to pool in funds that are then invested in the stock and money markets by professional money managers. The only difference between an index fund and a mutual fund is that the index fund follows a specific set of rules that track specific investments and index stocks.

ETFs

An Exchange-traded fund refers to an investment vehicle that is publicly traded in the stock exchange markets – much like shares and stocks. The fund is expert-managed and its portfolio comprises of such investment products as stocks, bonds, commodities, and more money market instruments like currencies.

Retirement

Retirement refers to the time you spend away from active employment and can be voluntary or occasioned by old age. In the United States, the retirement age is between 62 and 67 years.

Penny Stocks

Penny Stocks refer to the common shares of relatively small public companies that sell at considerably low prices. They are also known as nano/micro-cap stocks and primarily include any public traded share valued at below $5.

Real Estate

Real Estate can be said to be the land and buildings on a given property as well as other rights associated with the use of the property like the air rights and underground rights. Real estate can be either commercial if the land, property, and buildings are used for business purposes or residential if they are used to non-business purposes – like building a family home.

Real Estate Investment Trust (REIT)

REITs are companies that use pooled funds from members to invest in income-generating real estate projects. While a REIT may specialize in one real estate niche, most diversify and invest in as many high-income real estate projects as possible. They are especially interested in commercial real estate projects like warehouses, prime office buildings, residential apartments, hotels, timber yards, and shopping malls.

Asset

Asset simply refers to any resource of value or a resource that can be owned and controlled to produce positive value by an individual or business.

Broker

A broker is an intermediary to a gainful transaction. It is the individual or business that links sellers and buyers and charges them a fee or earns a commission for the service.

Capital Gain

Capital gains refer to the positive change in the price of a capital asset like shares and stock, bonds or a real estate project. It is the difference between the current selling price of the asset and its lower original buying price and it is considered a taxable income.

Hedge Fund

A hedge fund is an investment vehicle that pools together funds from high net worth individuals and businesses before having professional money managers invest it in highly diversified markets. The difference between mutual and hedge funds is that the later adopts highly complicated portfolios comprised of more high-risk high-return investments both locally and internationally.

Index

An index simply means the measure of change arrived at from monitoring a group of data points. These can be company performance, employment, profitability, or productivity. Observing a stock index, therefore, involves measuring the change in these points of a select group of stocks in a bid to estimate their economic health.

Recession

A recession in business refers to business contraction or a sharp decline in economic performance. It is a part of the business cycle and is normally associated with a widespread drop in spending.

Taxable Accounts

Taxable Account refers to any investment account that invests in shares and stocks, bonds and other money market securities. The account is offered by a brokerage company and you are obliged to report and pay taxes on the investment income each year.

Tax-Advantaged Accounts

A tax-advantaged account refers to savings of investment accounts that enjoy such benefits as a tax exemption or deferred tax payment. Roth IRA and Roth 401K are examples of tax-exempt accounts whose contributions are drawn from after-tax incomes with the yields generated from investing funds therein being tax-exempt. Traditional IRA, 401K plan and college savings, on the other hand, represent tax-deferred accounts. Their contributions are deductible from your current taxable incomes but you get to pay taxes on their accrued incomes.

Yield

Yield simply refers to the returns earned on the investment of a particular capital asset. It is the gain an asset owner gets from the utilization of an asset.

Custodial Accounts

A custodial account is any type of account that is held and administered by a responsible person on behalf of another (beneficiary). It may be a bank account, trust fund, brokerage account, savings account held by a parent/guardian/trustee on behalf of a minor with the obligation to pass it to them once they become of age.

Asset Management Company

An Asset Management Company (AMC) refers to a firm or company that invests and manages funds pooled together by its members. Like mutual or hedge funds, the AMC creates diversified investment portfolios that comprise of shares and stocks, bonds, real estate projects, and other low and high-risk investments.

Registered Investment Advisor (RIA)

A registered investment advisor is an investment professional (an individual or firm) that advises high-net-worth (accredited) investors on possible investment opportunities and possibly manages their portfolio.

Fed Rate

The fed rate in the United States refers to the interest rate at which banking institutions (commercial banks and credit unions) lend - from their reserve - to other banking institutions. The Federal Reserve Bank sets the rate.

Fixed Income Fund

A fixed-income fund refers to any form of investment that earns you fixed returns. Government and corporate bonds are prime examples of fixed income earners.

Fund

A fund may refer to the money or assets you have saved in a bank account or invested in a particular project. It may also refer to the collective basket of resources pooled from different clients that are then invested in highly diversified income-generating projects.

Value Investing

Value investing is the art of using fundamental analysis to identify undervalued shares and stocks in the market. It involves buying these shares at the current discounted prices and hoping that a market correction pushes them up to their intrinsic value effectively resulting in massive gains.

Impact Investing

Impact investing simply refers to any form of investment made with the aim of realizing financial returns while positively impacting the society, environment or any other aspect of life in the process. Investment in solar projects and green energy, for instance, posts profits and helps conserve the environment.

Investing App

An investment App is an online-based investment platform accessible through a smartphone application. It lets you save and invest your funds in a preset portfolio that primarily consists of shares and stocks, bonds, ETFs, and currencies based on your risk tolerance.

Real Estate CrowdFunding

Real Estate crowdfunding is a platform that mobilizes average investors – mainly through social media and the internet – encourages them to pool funds, and invests them in highly lucrative real estate projects. It can be said to be an online platform that brings together average investors and lets them enjoy real estate projects previously preserved for high net worth and institutional investors.

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