How to Invest in Stocks

I notice that a lot of my readers were searching for this basic question of how to buy stocks, so I thought it might be useful to you to synthesize some of the great content that’s been generated over the past several years, putting it in one easy-to-find and simple-to-use location for your convenience. This article is not designed to be stand-alone. Instead, each of the important concepts has been highlighted with a live link to a fuller, richer article or resource detailing the specifics of that topic.

How to Invest in Stock - The Four Major Ways to Invest

There are typically four major ways to invest:

1. Through a 401k plan or, if you work for a non-profit, a 403b plan
2. Through a Traditional IRA, Roth IRA, or SEP-IRA account
3. Through a brokerage account
4. Through a direct stock purchase plan or dividend reinvestment plan (DRIP)

How to Invest in Stock - The Five Types of Assets You Might Own

Generally, there are five types of assets the average investor is likely to own in their lifetime:

1. Common stocks – ownership of businesses
2. Preferred stocks – special types of stock that often pay high dividends but have limited upside
3. Bonds – corporate bonds, municipal bonds, savings bonds, U.S. government treasuries, etc.
4. Money markets – highly liquid funds that are designed to protect your purchasing power; considered to be a cash equivalent
5. Real estate investment trusts or REITs – a special type of company designation that allows no taxation at the company level provided more than 90% of earnings are paid out to the shareholders. The assets are often invested in a variety of real estate projects and properties.
6. Mutual funds including exchange-traded funds, index funds, and actively managed funds.

How to Invest in Stock - Doing the Research

When researching an investment there are typically five documents you want to get your hands on to research the relative merit of a potential stock:

1. The 10K – this is the annual filing with the Securities and Exchange Commission (SEC)
2. The most recent 10Q – this is the quarterly filing with the SEC
3. Proxy statement – includes information on the Board of Directors as well as management pay and shareholder proposals
4. The most recent annual report – read the report from the Chairman, CEO, and sometimes CFO or other high-ranking officers to see how they view the business. Not all annual reports are created equally. Generally, the best in the business is considered to be the one written by Warren Buffett at Berkshire Hathaway, which you can download from free on their corporate site.
5. A statistical showing going back five or ten years. Several firms prepare this type of information, mostly for a subscription, such as a Morningstar, Value Line, S&P, and Moody’s.

How to Invest in Stock - The Three Financial Statements

There are three financial statements you’ll want to examine closely:

1. The income statement
2. The balance sheet
3. The cash flow statement

How to Invest in Stocks - Some Other Tips and Helpful Resources

Finally, there are some things you’ll want to look for in a company and management:

• 7 Signs of a Shareholder Friendly Management – What to Look for and Why
• Ten Part Guide to Beating the Market
• Making Money in Bad Companies
• 7 Keys to Successful Investing – Basic Principles for Superior Results
• Invest in What You Know
• Rationality: The Investor’s Secret Weapon
• Business-Like Investing: Thinking Like an Owner
• The Investor’s Manifesto

And a few other things you may want to pick up on your investing journey:

• Intro to Stock Trading
• 10 Steps to Building a Complete Portfolio