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Did you know that investing $10,000 in Amazon in January of 2000 would give you over $406,000 today?
If you’re looking to buy your first stock, then you want to make sure that you take the right steps.
Finding the right stock can literally change your life. Here’s a look at 10 steps that will help you learn what to know about buying your first stock.
What to Know Before Buying Your First Stock
1. Your Risk Tolerance
Stocks can go up and down in value.
The worst thing that you can do is buy a stock and immediately sell when the price of the stock goes down.
Therefore, you need to know how much risk you are willing to take.
For instance, during Amazon stock’s run from 2000 to 2021, the stock fell up to 92% in value!
If you are looking for that homerun stock, then you have to be willing to see tremendous drawdowns.
If you are looking for modest gains, then you won’t have to deal with big drawdowns.
2. Your Area of Expertise
Some people are able to find winning stocks in areas that they understand.
For instance, a pharmacist may have intimate knowledge of drug stocks that can give her an edge against other investors.
Look at publicly traded companies in your industry to see if you can find any unique opportunities.
3. How Long to Hold
You should know if you want to be in a stock for a short term or for the long term.
Ideally, you will want to buy a stock that you can own forever.
Most stocks do not go up dramatically in value over a short period of time.
However, there are a number of stocks that deliver incredible returns over a 10, 20 or 30 year period.
Be sure to know your investment window before buying your first stock.
4. Your Investment Goals
Are you looking to invest for income? Then you will want to consider a dividend paying stock.
Looking to invest for your retirement in 40 years? Then you may want to consider a growth stock.
Knowing your investment goals can help you determine which first stock to buy.
5. When You’ll Need the Money
Make sure that you are not investing money that you will need for other expenses. This will make you more likely to sell off your stocks at the first hiccup in the market. Be sure that your first stock purchase involves funds that you don’t need at the moment.
6. Earning Reports Dates
Every quarter, publicly traded companies are required to report their earnings report. An earnings report will disclose how much the company made in revenue and profit or losses.
During an earnings report, a company will also disclose other information about the company.
Earnings reports can move the price of a stock dramatically. Therefore, you should know when a company you buy stock in, delivers its quarterly earnings report.
7. Moving Averages
Moving averages are the average price of a stock over a certain period of time.
For instance, the 50-day moving average is critical. A stock over the 50-day moving average will tend to move higher.
A stock below the 50-day moving average will tend to move lower.
Be sure to know if a stock you want to buy is above or below its 50-day moving average.
You can find a moving average for any stock by doing a Google search for a stock followed by the phrase “moving average.” For instance, you can Google, “Microsoft 50-day moving average”and the search engine will give you the current 50-day moving average on the Microsoft stock.
8. Your Stop Loss
Many investors will use what is known as a stop-loss to automatically sell a stock if it falls below a certain price.
Many broker platforms allow you to set a stop-loss.
If you feel uncomfortable with your first stock falling below a certain price, then you may want to set a stop-loss right after you purchase the stock.
Here’s an example of a stop loss. Say you buy stock in Apple at $500 a share. You don’t want to own the stock if it falls below $450 a share. Therefore, you put in your stop-loss at $450. if Apple falls below $450 a share, the broker will automatically sell your shares.
Dividends are payments made to shareholders on a monthly, quarterly, or annual basis.
A dividend is an ideal way for investors to make money without having to sell a stock. You can also elect to have your dividends reinvested into buying more shares.
Here’s an example of dividends: Let’s say Coca-Cola stock is paying 2% dividend on its stock. After one year of owning the $10,000 of Coca-Cola stock, you will collect $200 in dividends which you can keep or re-invest into buying more Coca-Cola stock.
10. Capital Gains
Capital gains is the tax that you have to pay on the profit of a stock sale.
There are short-term capital gains that are taxed at a higher rate and long-term capital gains that are taxed at a lower rate.
If you want to pay lower capital gains on your tax, then be sure to hold your stock for over a year before you sell.
Currently, capital gains taxes in the United States are taxed as ordinary income.
For instance, if you are in the 33% tax bracket, then your short-term capital gains are 33%. Long-term capital gains is set at the following levels for the 2020 tax year:
- 0% on income up to $53,600
- 15% on income from $53,601 to $469,050
- 20% on income over $469,051
It’s important to know the ins and outs of the market before you buy your first stock.
This knowledge will allow you to make the right stock purchasing decision and to have a better understanding of the markets. With the right knowledge, you should be able to make your first stock purchase a successful one.