Do It Yourself Stock Investor

Basic Stock Investing

by DIYSI
February 22, 2017

This article addresses the basic question that new, aspiring investors are too embarrassed to ask and financial blogs quickly skip over, "how do I buy stocks?" Here is a step-by-step process that explains how to buy a company's shares for a long-term hold.

You've come to the conclusion that you want to be a DIY Stock Investor; to invest in stocks without a bankers assistance. After observing the low interest rates of savings accounts, CDs and bonds, their products don't interest you. Additionally, most of the financial products offered tie up money for five years and longer. A 5yr CD might return a measly 2% each year.

A microcap and smallcap stock can return over 100% on investment in as little of time as one year. However, the investment comes with significant risk of loss compared to a conventional bank CD. There is no requirement to hold the stock investment for five years or longer. Holding it for at least a year is commonly referred to as a long-term investment. A long-term investment is incentivized with a lowered capital gains tax, which is not offered to short-term holds or day trading.

To purchase a stock you will need: (1) a stock screener to assist in sorting and selecting through various stock performances; (2) the ticker symbol associated with the stock to conduct further research and ultimately complete the order; (3) a basic understanding of the stock market to identify risk vs reward; (4) a narrative/thesis for the company, aka, a stock tip; and (5) an online stock broker, e.g., E*TRADE (NASDAQ: ETFC).

  1. Stock Screener
  2. Ticker
  3. Stock Market
  4. Stock Tips
  5. Buy Via An Online Stock Broker

Stock Screener

A stock screener is a service that allows you to quickly sort through companies based on various criteria: market capitalization, price to earnings ratio (P/E), gross margin, etc. Many screeners are free to use and may charge for upgrades. Google Finance has a screener and is fairly easy to use. TipRanks functions as a screener, but mainly screens through the recommendations made by experts (banks and bloggers). TipRanks is great for tracking target prices on stocks and checking the record of an expert's past predictions. The records on each expert are measured by a scale of 0-5 stars and the average return of their picks. My ranking as a Seeking Alpha analyst has primarily been 4.5 stars.

The best stock screener that I have used thus far is FinViz, which stands for Financial Visualizations. A DIY Stock Investor can start out using the free version to get their bearings, and then upgrade for elite screening. FinViz can show the stocks with the highest of recent loss and oversold statuses. It can show which stocks have the best value according to price to book, sales growth and the list goes on. You can search by industry, sector and country of origin. FinViz gives countless chart functions to aid day and swing traders, however these charts are also valuable for long-term investors.

Ticker

A ticker is the acronym or symbol that a company uses for the trading of its stock. A couple examples are Apple, Inc. and Ford Motor Company. Apple trades on the National Association of Securities Dealers Automated Quotations exchange. This is more commonly called the NASDAQ. Ford trades on the New York Stock Exchange, more commonly referred by its acronym, the NYSE. Apple's stock ticker is AAPL and often displayed as: (NASDAQ: AAPL). Ford is displayed as (NYSE: F).

Find sales on Ford parts: Wheels, Tires and Accessories - JC Whitney

When searching for a stock in a screener or making a purchase, the ticker is used to reference the company. You can also use it to search regulated filings at the U.S. Securities and Exchange Commission/sec.gov. The dollar sign is a popular modification to the ticker ($AAPL), which functions like a hashtag (#) in StockTwits, Twitter and other social networks.

Stock Market

The stock market could be likened unto a network of local farmer's markets. Imagine the local display of apples for sale. Now imagine walking to the other side of the market to find another vendor selling the same comparable apples $0.30 cheaper per pound. A bargain is found with a little leg work and shopper intuition. If the price difference is even greater, we might sell our acquired product to the vendor on the other side of the market for a quick financial gain.

A stock is not the direct purchase of the product (apple), it is the buying of a piece of the company. The stock market quickly makes it known where the cheaper ask and the higher bid is located. It is not shielded by multiple vendors of corn and broccoli in between. What if the latest news alert informs the consumer that apples will no longer have weather conditions to grow for the remainder of the season? The consumer is likely to buy the full supply of the cheaper apple and then rush over to the higher priced vendor and also buyout their supply. In the stock market this change of demand can be immediately detected and the vendors, or in this case, those already holding shares of the company will adjust the price per share (PPS). This is a basic illustration of how a DIY Stock Investor might gain in their investment: they buy a company's stock and over the course of a year the demand for the company's product/stock greatly increases.

A stock can be affected by the change in demand of its products/services and also a change in knowledge of the company. For example, a microcap company like Neptune Wellness Solutions (NASDAQ: NEPT) can have year-over-year (y/y) revenue growth, bargain value P/E, and cash on hand for acquisitions; but if the market is unaware these developments the stock PPS will remain stagnant. This is why some hedge funds, stock groups and shareholder activists (Bill Ackman, Carl Ichan) will try to broadcast company information to all that will listen.

If a stock PPS significantly drops, why would a shareholder sell and not just wait for a recovery? This question further illustrates another aspect to the markets activity. Many financial institutions have rules as to when they must sell their position in order to limit loss. Smaller investors and traders also have these personal rules, commonly referred to as stops. This can protect against major losses, in other words the shareholder is willing to lose 10% rather than risk waiting for a recovery that may never occur in a timely manner. They fear that they could also lose 30%, 40% or more if the PPS continues to drop. In some instances a person is forced to sell due to a contract known as an option (more on options in pending article). Ultimately, there are those that sell in fear and conservation and those forced to sell via contract that can cause a huge sell-off. These are just some of the dynamics in the market and why it is full of volatility.

There are some markets more trusted than others. The NYSE and NASDAQ have certain rules of governance for companies that list their stock. A common one is that they must file quarterly financial statements with the SEC. Another one is that the PPS must trade above $1. Other markets include the Over The Counter (OTC) groups. Stocks listed in the OTC typically carry extra risks.

Stock Tips

Stock tips typically consist of a reasonable thesis that things are about to get better or worse. One example would be the analysis of a recent merger/acquisition (M&A). Apple, Inc. keeps abundant cash on hand and is often speculated to be buying another company. Shareholders wish it's their company that will be acquired. A stock tip might be from someone who has done the math and research on a recent M&A, which reveals the synergy of these newly formed companies will boost sales and reduce expenditures.

Another stock tip could be the chatter of a CEO stepping down and the receiving of a well needed replacement. Such was the case of when The Female Health Company/Veru Healthcare received new CEO, Dr. Mitchell Steiner.

Early indicators of new product sales can also prove to be a good tip. It's not always enough to have just reviewed fundamental metrics in the trailing performance (review of SEC forms). Stock tips take risks, speculating to future events. The goals is to invest early at low PPS before the outcome materializes and everyone knows about the news. When the stock tip plays out, people will join late, often inflating the price as they chase a good thing.

Several financial websites and subscription services provide leads or stock tips. One service I prefer is Seeking Alpha. This is a large group of contributors and you can usually find both sides of the argument for a stock. This gives a reader a chance to read the pros and cons.

TipRanks curates investing ideas too. Some of the themes include: Insider's Hot Stocks, Trending Stocks, Top Rated, and the Smart Portfolio. All of these themes include tips constructed by expert financial analysts and often display their written work that lead to such conclusions.

Another tip source ran by TipRanks is the following special:

Online Stock Broker

One could skip all the prior steps if they really wanted. Several online stock brokerages also keep analysis, curate tips and operate stock screeners too. Scottrade is a popular brokerage. There is also Ameritrade and E*TRADE. Just choose a brokerage, sign-up, and transfer in some funds. Once that is complete you can pick a stock to buy kind of like the following steps below.

1) Enter a ticker in the search field. Click on the buy button.

2) Select quantity of shares and the price type. Here "Market" is selected and the term will last the full day. Market means to execute the buy at the current price. There are other options including limit, which sets a price at a low-desired price to purchase the stock. If it occurs, the transaction takes place. If the price does not drop that low, the buy request expires without fulfillment.

These online stock brokerages will help most DIY Stock Investors along the way. The steps are fairly easy for a basic purchase of shares. When it's time to sell, the steps are nearly the same.

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Disclosure: I am/we are long F, NEPT, FHCO.