Securities Investment 101: Navigating The Buying Process

There are several ways to buy securities investments, each with its own advantages, challenges and risks. In North America, you can trade investment securities through four main avenues: the company that issues them, individual investors, brokerage houses, and banks.

One of the most common and easiest ways to buy securities is through a brokerage house. Brokerage firms require you to open an account and deposit funds, and they do much of the behind-the-scenes work, such as completing paperwork and ensuring timely dividend payments.

Another option is to buy securities directly from the issuing company. This method can be more difficult and includes considerations such as whether you are comfortable holding the securities yourself and if you need access to funds immediately.

Additionally, most banks offer mutual funds and bonds, providing an easy way to invest, although their selection is usually limited to funds offered by the bank or its partners.

Before investing, it is important to consider your personal circumstances and risk tolerance to determine which securities are the best fit for your portfolio.

How to open a brokerage account

Opening a brokerage account is a simple process and can be done online. It is the first step to buying stocks, bonds, mutual funds and other investments. Here is a step-by-step guide on how to open a brokerage account:

Figure out where to open a brokerage account:

Ask yourself: What are my primary investing objectives? For example, if you want the convenience of having everything in one place, consider the broker where your company has its 401(k) plan or where you already have an IRA. Other considerations include whether the company offers account features you like and will use, responsive customer service, a user-friendly website and/or app, and competitive commissions and fees.

Decide what kind of account you want:

You can approach investing within a brokerage account in a few different ways. You might opt to DIY your investments and manage them yourself, or you could work with a financial advisor to help select and manage your investments for a fee. For something in the middle, you could consider a robo-advisor, which can help build a portfolio using technology that takes into consideration your goals, risk tolerance, and time horizon, among other variables.

You'll also need to decide if you want a cash account or a margin account. A cash account means you buy investments with the money in the account. A margin account means the brokerage loans you money to buy securities (i.e. "buying on margin"). Only investors who fully understand the risks (including the possibility of magnified losses) should consider enabling margin trading.

Fill out the application:

A brokerage account application will usually ask for personal details, employment info, investment profile, and, if you'll be investing online, bank information. The process could take only a few minutes online.

Fund your account:

Once you open a brokerage account, you can link it to a bank account and transfer money. Once you've been approved to trade and have funded your account, you are ready to invest. Keep in mind that some securities require minimum investments, though you may be able to start investing with as little as $1 by buying fractional shares in certain stocks and ETFs.

Invest using the cash in your account:

Even if you've transferred money into your brokerage account, you haven't invested until you make a transaction. If you don't, your money will sit in an account called cash reserves, core, or sweep account. While these accounts pay some interest, you're missing out on any potential gains from investing in stocks and bonds that have a chance to benefit from compounding returns over time.

In addition to one-off investments, you may also choose to set up auto-invest, which is when you invest a certain amount of money at specific intervals no matter what the price of a security is. This is a strategy known as dollar-cost averaging, which is when you invest at regular intervals regardless of the price.

Check in on your investments:

Whether you are doing it yourself or working with a financial professional, monitor your investments periodically. It is recommended to do this at least annually, after a major change in financial circumstances, a life event like marriage or having a child, or after big market swings to see if your resulting portfolio still aligns with your financial goals, risk tolerance, and time horizon.

How to research stocks

Step 1: Understand the Two Types of Stock Analysis

There are two primary ways to analyse stocks: fundamental analysis and technical analysis. Fundamental analysis is based on the idea that a stock price does not necessarily reflect the intrinsic value of the company. This method is used by value investors to find the best investment opportunities. Technical analysis assumes that a stock's price reflects all available information and that prices generally move according to trends. In other words, by studying a stock's price history, you may be able to predict its future behaviour.

Step 2: Learn Important Investing Metrics

• Price-to-earnings (P/E) ratio: This is a company's share price divided by its annual per-share earnings. For example, if a stock trades for $30 and the company's earnings were $2 per share over the past year, the P/E ratio would be 15, or 15 times earnings. This is a common metric in fundamental analysis and is useful for comparing companies in the same industry with similar growth prospects.
• Price-to-earnings-growth (PEG) ratio: This ratio takes a stock's P/E ratio and divides it by the expected annualised earnings growth rate over the next few years. For example, a stock with a P/E ratio of 20 and a 10% expected earnings growth rate over five years would have a PEG ratio of 2. This metric can indicate whether a fast-growing company is a better value than a slower-growing one.
• Price-to-book (P/B) ratio: A company's book value is the net value of all its assets, or the amount of money it would theoretically have if it shut down its business and sold everything it owned. The P/B ratio compares a company's stock price to its book value and is best used in conjunction with other metrics to compare businesses in the same industry.
• Debt-to-EBITDA ratio: A company's debt can be a good indicator of its financial health. The debt-to-EBITDA ratio is calculated by dividing a company's total debt (found on its balance sheet) by its EBITDA (earnings before interest, taxes, depreciation, and amortisation, found on its income statement). A high debt-to-EBITDA ratio could indicate a higher-risk investment, especially during economic downturns.

Step 3: Look Beyond the Numbers

While finding a good bargain is important, it's even more crucial to invest in a good business rather than a cheap stock. Here are three essential components of stock analysis to watch:

• Durable competitive advantages: As long-term investors, we want to know that a company can sustain or increase its market share over time. Look for a durable competitive advantage, also known as an economic moat, in the company's business model. This could come in the form of a trusted brand name, patents, a large distribution network, etc.
• Great management: The right people need to be making key decisions. Ideally, the CEO and other executives should have successful and extensive industry experience, and their financial interests should align with shareholder interests. High insider ownership and a large proportion of stock-based incentive compensation are two things to consider.
• Industry trends: Focus on industries with favourable long-term growth prospects, such as e-commerce, cloud computing, payments technology, and healthcare.

Step 4: Practice and Review

Understanding your investing goals, risk tolerance, and how to research stocks that meet your objectives is just the first step. Practise making investments using a practice trading program. Once you've made your investment choices, it's crucial to manage them using the tools mentioned earlier. Additionally, consider using a portfolio-level review tool to see if the stocks you've researched are collectively meeting your investing objectives.

How to decide how many shares to buy

When deciding how many shares to buy, there are several factors to consider. Here are some guidelines to help you make an informed decision:

• Risk Tolerance and Investment Goals: Determine your level of risk tolerance and align your investment decisions with your financial goals. Consider whether you are comfortable taking on more risk for potentially higher returns or if you prefer a more conservative approach.
• Diversification: Diversifying your investments across multiple stocks and sectors can help reduce risk and maximise potential returns. It is generally recommended to hold at least 10-15 different stocks in your portfolio. However, diversification should also consider different types of assets, such as large-cap, small-cap, growth, income, bonds, and commodities.
• Investment Capital: Calculate how much money you have available to invest. You can determine the number of shares to purchase by dividing your investment capital by the stock's price, allowing for fractional purchases if available.
• Fractional Shares: Consider taking advantage of brokers that offer fractional share trading. This allows you to buy a portion of a share, providing access to stocks with high share prices and facilitating easier diversification.
• Brokerage Fees: Be mindful of the fees charged by your brokerage platform. If your broker charges a flat rate per transaction, ensure that the fee does not significantly impact your returns, especially for smaller investments.
• Regulatory Rules and Reporting Requirements: Large stock purchases may trigger regulatory requirements, such as public disclosure of your intentions or providing a tender offer. Be aware of these rules and plan your purchases accordingly.
• Market Supply: The number of shares available in the market can limit your ability to purchase a large number of shares in a particular company. Competitive investors often buy shares incrementally to prevent a sudden increase in price.
• Stock Price and Volatility: Evaluate the stock price and its volatility. If you are investing in smaller company stocks or during periods of short-term market volatility, consider using limit orders to have more control over the price at which your trades are executed.
• Time Horizon: Consider your investment time horizon. If you have a long-term horizon, you may be able to take on more risk and be more aggressive with your portfolio allocations.
• Portfolio Tracking: Utilise portfolio tracking tools to monitor your current holdings and their performance. This will help you make informed decisions about new stock purchases and ensure you stay within your risk tolerance and investment goals.

How to buy stocks using the right order type

When buying stocks, it is important to understand the different types of orders available to you. The two most basic stock order types are market orders and limit orders. Each serves a specific purpose and has its own advantages and considerations. Depending on your investing style and goals, different types of orders may be more suitable for you. Here is an overview of how to buy stocks using the right order type:

Market Order

A market order is an instruction to buy or sell a stock immediately at the best available market price. It prioritises speed and execution over price. When you place a market order, your trade will be executed at the next available price, which may be different from the quoted price when you initially placed the order. Market orders are suitable when you want your order to be filled quickly and are less concerned about the exact price. They are commonly used when you believe a stock is priced right, or when you are sure you want your order to be filled. However, it's important to remember that market orders do not guarantee a specific price, and the last traded price may not be the execution price, especially in volatile markets.

Limit Order

A limit order is an instruction to buy or sell a stock at a specific price or better. You can set a maximum price you are willing to pay (buy limit) or a minimum price you are willing to accept (sell limit). A limit order allows you to control the price you trade at and ensures you don't pay more than a predetermined price. However, there is no guarantee that the order will be executed immediately or at all if the market price doesn't reach your specified limit. Limit orders are suitable when you have a target entry or exit price and are willing to wait for the market to reach that level. They are often used for volatile investments to mitigate the risk of paying substantially more due to price swings.

Stop Order

A stop order, also known as a stop-loss order, is an instruction to buy or sell a stock once the price reaches a specified level, known as the stop price. When the stock hits the stop price, the order becomes a market order and is filled at the next available market price. A buy stop order is placed above the current market price, while a sell stop order is placed below. Stop orders can be used to limit losses or protect profits. They are useful when you want to buy a stock that is rising or sell a stock that is falling. However, short-term market fluctuations can trigger a stop order, so the stop price should be selected carefully. Stop orders do not guarantee a specific execution price, especially in volatile markets.

Additional Considerations

When choosing the right order type, consider your investment goals, risk tolerance, and market conditions. Market orders are suitable when you prioritise speed and immediate execution, while limit orders are better when you have a specific price in mind and are willing to wait. Additionally, consider the liquidity and volatility of the stock, as well as the potential impact of market hours and fluctuations. Remember to always review the fees and conditions associated with different order types and ensure you understand the risks involved.

How to sell stocks

Selling stocks is an essential step in the art of investing. It is one of three primary moves you can make with a stock, the other two being buying and holding. There are several ways to sell stocks, each with its own advantages, challenges, and risks. Here is a step-by-step guide on how to sell stocks:

• Know when to sell stocks: The best time to sell stocks depends on your investing strategy, timeline, and risk tolerance. Generally, you should sell stocks when you've made a profit, when the stock starts to decline, when market trends change, or when you want to bet against a stock.
• Decide on an order type: There are various order types available when selling stocks, including market orders, limit orders, stop orders, stop-limit orders, and trailing-stop orders. Each order type has its own advantages and risks, so it's important to understand them before placing a sell order.
• Fill out the trade ticket: Contact your broker or use their website or trading platform to fill out a trade ticket or order form. You will need to provide details such as the symbol of the stock, the number of shares, the order type, and the "time in force" or order expiration.
• Consider capital gains tax implications: When selling stocks, it's important to consider the tax implications. Consult a tax advisor to understand the tax consequences of selling stocks at a gain or loss.
• Avoid panic and emotional selling: New investors often panic when stock prices fall and sell hastily to limit losses. It's important to remember that losses will only be realized if you sell during a downturn. If the stock is otherwise solid, holding on to it may allow the share price to recover.
• Monitor economic and market conditions: If the economy, stock market, and underlying company conditions are strong, you may consider holding on to your investments a bit longer. Conversely, if the market is weak, you may want to sell or use a matching strategy, such as investing in fixed assets.
• Stick to your investment goals and strategy: When selling stocks, it's crucial to align your decisions with your investment goals, strategy, and holding period. Consult a professional money manager if needed to ensure your actions align with your long-term investment plan.

Frequently asked questions