Profiting From The Markets: A Beginner's Guide To Buying And Selling Investments

There are several ways to buy and sell investments, each with its own advantages, challenges, and risks. In North America, there are four primary methods: through the company that issues them, individual investors, brokerage houses, or banks. Brokerage firms are one of the most common and easiest ways to buy and sell stocks, mutual funds, and bonds. They typically require you to open an account and deposit funds, and they handle much of the paperwork and administrative tasks. Discount brokerages, which have become increasingly popular, offer lower fees but require the investor to do more work themselves. When deciding when to buy or sell, it's important to base decisions on thorough research rather than trying to time the market.

Buying stocks through a brokerage firm

Types of Brokerage Firms

There are two main types of brokerage firms: full-service and discount.

Full-Service Brokerage Firms

Full-service brokerage firms provide investment advice and charge fees and commissions for their services. They typically require you to open an account and deposit a certain amount of funds. They do much of the behind-the-scenes work, such as completing the necessary paperwork and ensuring timely dividend payments. Historically, investors would contact their full-service brokers to purchase different stocks and bonds on their behalf. Due to the personal relationship between the investor and broker, full-service brokers often provide recommendations for buying or selling securities.

Discount Brokerage Firms

Discount brokerage firms, on the other hand, are usually online firms that charge lower commissions because they do not offer investment advice or help with choosing investments. With discount brokerages, investors have to do most of the work themselves. You can buy stocks, bonds, or mutual funds by calling one of their investment representatives (who will collect a commission) or by completing the transaction yourself online.

Choosing a Brokerage Firm

When choosing a brokerage firm, it is important to consider your investment goals, risk tolerance, and the level of service you need. If you are new to stock investing, you may want the advice of an advisor at a full-service firm. On the other hand, if you have experience investing and are comfortable doing your own research, you may prefer the lower commissions of a discount brokerage.

Placing Orders

Once you have chosen a brokerage firm and opened an account, you can start placing orders to buy or sell stocks. You will need to provide the following information:

• What you want to buy or sell
• How much you want to buy or sell
• The price you want to pay
• How you want to pay

There are two common types of orders: market orders and limit orders. A market order is when a stock is bought or sold at the latest price, while a limit order allows you to set a price limit for the highest price you're willing to pay or the lowest price you're willing to sell at.

Fees and Commissions

When you buy and sell stocks through a brokerage firm, you will pay a fee called a commission. The range of fees depends on the type of firm you choose. Full-service investment firms typically charge higher commissions, while discount brokerage firms offer lower commissions. It is important to consider how frequently you plan to trade, as buying and selling stocks often can result in higher commissions and reduced returns.

Full-service vs discount brokerages

When choosing a broker for your investments, you'll need to decide whether to get a full-service broker or a discount broker.

Full-Service Broker

A full-service broker is a broking company that provides a host of services to their clients. They offer a high level of personal service for your investments but at a higher cost. They usually have deep research departments that provide research for investors on numerous individual stocks, market sectors, and other areas. They also provide advisory services for various investment products.

Full-service brokers work for large brokerage houses like Merrill Lynch Wealth Management, Edward Jones, and Morgan Stanley. They will execute trades for their clients, research investments, and give advice. They also offer services such as portfolio and wealth management.

Full-service brokers are ideal for those who are uncomfortable with the idea of managing their own investments or do not have the time to do so. They are also a good choice for those who have enough money to make it worthwhile, as some full-service brokers offer discounts when you have a certain amount of assets.

However, the main downside to a full-service brokerage is the high cost. Commission rates can be very high, and those who take advantage of management services often pay a percentage of their total assets in fees each year. For a $100,000 brokerage account, you could pay thousands of dollars in annual management expenses.

Discount Broker

A discount broker is a broker firm that allows you to trade in stocks and other investments online. They carry out buy and sell orders at a reduced commission rate compared to a full-service broker. They are known for offering low-cost brokerage and only provide essential services, undertaking the buying and selling of orders without providing advice.

Discount brokers are ideal for those who don't have a lot of money upfront or who like being personally involved in their investment decisions. They are also a good choice for those who are comfortable with technology, as many discount brokers have proprietary trading platforms.

Discount brokers give only limited general guidance, but the commissions are much lower, so your returns aren't as impacted by fees. Some well-known discount brokerages include E-Trade Financial Corp., Fidelity Investments, Charles Schwab Corp., and TD Ameritrade.

The right option for you will depend on your knowledge, time, and needs. If you have been investing for a long time and have good knowledge about investing, then you could go for a discount broker. On the other hand, if you do not have much time to research by yourself, then a full-service broker is the better pick. Additionally, if you need a financial advisor to guide you in your investing, then a full-service broker is a good choice.

When to buy and sell

When to Buy:

• When a stock goes on saleundervalued or experiencing excessive pessimism. The period after any correction or crash has historically been a great time for investors to buy at bargain prices.
• When it is undervalued: Use valuation techniques such as discounted cash flow (DCF) analysis or compare the company's dividend growth and price-to-earnings (P/E) multiple to its competitors to identify if a stock is undervalued.
• When you've done your homework: Conduct thorough research before buying a stock, including reading the company's annual report, news releases, and presentations to investors.
• When you are patient: Don't expect immediate results after buying a stock. It can take a couple of years for a stock to appreciate and reach its true value, so be prepared to hold it for the long term.

When to Sell:

• You've found something better: If you identify another investment opportunity that offers higher returns with minimal risk, it may be worth selling your current stock to take advantage of the new opportunity.
• You made a mistake: If you realize that a stock you purchased was a mistake, it's best to cut your losses and sell it, even if it means taking a short-term loss.
• The company's business outlook has changed: Keep an eye on the company's future prospects and be prepared to sell if its business outlook deteriorates due to increased competition or technological disruption.
• Rebalancing your portfolio: If a particular stock has performed well and accounts for a large portion of your portfolio, consider selling some shares to maintain proper allocations and avoid overexposure to a single stock.
• Valuation no longer reflects business reality: Sometimes the market can get overly optimistic about a company's future prospects, driving the stock price to unsustainable levels. If the stock price is not justified by the company's fundamentals, it may be time to sell.
• You need the money: If you require a significant sum of money in the near future, it's generally not advisable to keep it invested in stocks. Sell your stocks to meet your immediate financial needs.

Remember, the decision to buy or sell investments should be based on a well-informed strategy rather than emotional reactions to market fluctuations. Consult with a financial professional if needed to help you develop an investment plan that aligns with your financial goals and risk tolerance.

Investment clubs

There are a few things to keep in mind when joining or starting an investment club. Firstly, it is important to find a club that aligns with your investment goals and style. Secondly, it is crucial to understand the structure of the club, including whether members pool their money or invest separately. Thirdly, potential members should research the club's bylaws, fees, and the types of investments the club is considering. Finally, it is important to be aware of the risks involved, such as members wanting to withdraw their money too quickly or a lack of investment knowledge within the group.

When starting your own investment club, it is recommended to first observe or join existing investment clubs to get a sense of how they work. It is also important to determine the group's goals, form a legal entity, open a brokerage account, and establish clear investment guidelines.

Keeping charges low

Investment fees are an inevitable part of the process, but there are ways to keep charges low. Here are some strategies to keep your expenses down:

• Choose a no-fee brokerage firm: Most brokerages no longer charge for trading stocks, ETFs, or mutual funds. By opting for a no-fee brokerage firm, you can keep your costs down.
• Consider a robo-advisor: Robo-advisors use algorithms to manage portfolios, so they often come with low or no fees. This can be a great option for small investors.
• Invest in Exchange-Traded Funds (ETFs): ETFs typically have lower expense ratios than mutual funds. By choosing ETFs with low expense ratios, you can keep your costs down.
• Avoid front-end and back-end loads: Mutual funds may have front-end loads, which are commissions charged upfront, or back-end loads, which are charged when you sell the fund. Opt for no-load mutual funds to avoid these fees.
• Choose a discount broker: If you like to actively pick and choose your stocks, consider using a discount broker that charges lower fees per trade. This can help you avoid excessive transaction fees.
• Beware of annual and custodian fees: Some brokerage firms charge annual fees, especially if you don't trade frequently or maintain a certain account balance. Be mindful of these fees and consider choosing a firm that doesn't charge them.
• Understand tax implications: Taxes can be a complex but important aspect of investing. Consult a professional to help you navigate tax-loss harvesting and other strategies to minimize the tax burden on your investments.
• Utilize tax-deferred or tax-exempt accounts: Consider using tax-deferred accounts such as 401(k)s and traditional IRAs, or tax-exempt accounts such as Roth IRAs. These accounts can help you save on taxes and maximize your returns.

Frequently asked questions