If you have read the previous post, then you have the basic idea of what stocks are. Now, without further ado, let’s jump into the important part- How to buy stocks?
To buy stocks, you need the help of brokers. There are basically three kinds of brokers:

1. Full-Service Brokers
2. Discount Brokers
3. Online Brokers

Full service brokers will give you the advice on what stocks to buy. They will do all the research for you and advise you to take necessary actions. For a small investor, they are might prove little costly, but rightly so. Since they do all the figuring out, they charge more than others. If you want to get more info on Full-service brokers then call National Association of Securities Dealers at 800-289-9999.

Discount brokers, as the name suggest charge less commission than Full service ones. You have to do your own research. You just tell them what stocks to buy and they will process your order. They charge between $15 to $30 for 1000 shares or less.

The third one and perhaps the most convenient for small investors are online brokers. Now a days, most Full-service brokers are opening online services and charging less commission. They are literally hundreds of online brokers around. Trading has become so much faster and easier because of online brokers. If you are not a person who likes to deal with people, then all you have to do is open an account with an online broker. Unless you want to, you never really have to see or talk to anyone. You do your own research, deposit money in your account, choose the stock and number of shares you want to buy and place your order. It is that simple. You will get all your trading confirmations online.

I will post detail information on how to place trade orders and review some of the cheapest and the best online brokers in my future posts.

Let me go over the different types of investment.

Most Common Investment Types:

1. Common Stock When we talk about stocks, we generally mean common stocks. When you buy a stock, you own a small piece of a company. Stocks can be bought or sold on a stock market and the price can go up and down. More info on stocks can be found on the previous post.

2. Preferred Stock: Preferred stocks are similar to common stocks except they receive dividends before common stocks do. If a company goes bankrupt, preferred shareholders are paid before owners of common stock.

3. Mutual Fund: Mutual fund is a collection of many stocks, bonds and/or cash in one group. Rather than investing in individual stocks you are investing in a pool of securities. It is generally overseen by a professional manager.

4. Exchange-Traded Fund (ETF): ETFs are like Mutual funds because it contains a combination of different underlying stocks, but it is traded like stocks. Some ETFs may focus on the stock indexes like S&P 500 or Dow Jones Industrial Average while others may focus on different sectors like oil, technology, gold, etc.

5. American Depositary Receipt (ADR): This is the kind of investment through which you can own stocks of a foreign company that is traded outside the United States. They are not available for all foreign companies and are traded in the US stock exchange in USD.

6. Option: Option trading is a little more complex than normal trading. When you own a option contract, it gives you the right to buy (call) or sell (put) shares of stock at a specific price. The contract is generally good for a specific amount of time. Option contracts can be bought or sold and are primarily for experienced investors, due to their complexity and risk.

7. Closed-End Fund: A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. The price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium (or discount) placed on it by the market.

8. Real Estate Investment Trust (REIT): These are traded in the stock market like stocks. Real estate investment trust (REIT) allows you to invest in real estate properties and/or mortgages and possibly earn dividends.

Newbies, let’s start with the basics- What are stocks? Before you begin buying and selling stocks you have to understand what they are.

Stocks are basically a share in the ownership of the company. If you own stocks of a certain company then technically you own part of that company. Stocks are issued or sold by the company to raise its capital. If the company performs well then the price of its stocks increases and the investors make money. On the other hand, if the company fails, then investors loose money. So, investing in stocks can make you a lot of money, but there is also the risk of losing everything.

Although I said owning a stock is like owning a piece of the company, but that does not mean you have any say in the day to day running of the company. The only main power you have as a shareholder of a public company is the power to vote to elect the board of directors. The power of your vote depends on the number of shares you hold. In short, more shares more power.

Another important thing about stocks is limited liability. If you own stocks of a company, you are not responsible for paying the debt of the company. You are entitled to unlimited profit (due to increase in the value of shares and/or dividends), but you can only lose what you have invested.

Did I say unlimited profit? Yes, I did. In theory, the price of a stock can go to infinity, but it never ever happens. Although, there are many cases where the profit have been more than 1000% or 5000%. In fact, much more. Yes, there are risks and there are rewards. You can let your cash sit in your savings account and get a measly 2-3 percent every year or invest into something with way more return potential.

Maybe you prefer keeping your money in the savings account, but my advice to you is at least understand what stocks are and how to buy and sell stocks. Ignorance is not always bliss, it only causes opportunities to be missed.

To all the Stock Noobs, I will end this post with an old Chinese proverb:

“Give a man a fish; you feed him for a day. Teach a man to fish and you feed him for a lifetime”