Written by Norman Isaac Mwambazi

Beginner’s guide for novice stock investors

The world over, people are increasingly getting interested in investing in company stocks. Stocks are those non-physical assets you can …

The world over, people are increasingly getting interested in investing in company stocks. Stocks are those non-physical assets you can invest your money in with expectations of getting profits from them later.

Whereas some investors have got investment or financial advisors that help them make informed decisions on where and when to invest, others are held back by the lack of this knowledge and end up keeping their money seated in the bank, bringing them near to zero interest.

In this article, I aim to be your virtual financial advisor, and I will walk you through all you need to know before you invest in stocks. At this point, I will assume that you already have your capital set aside for this kind of investment, and the time needed. Do not worry; you will not need a year.

First things first; what is stock?

Stock, in the simplest of terms, is a share of a publicly traded company. Owning stock means you own part of the company, however small it is. Your dream to own part of Amazon becomes a reality when you buy their shares from the stock exchange.

Beginner's guide for novice stock investors
Photo by JOHANNES EISELE/AFP via Getty Images.

Companies create stock for many reasons, but most of the time they want to raise capital from investors – you in this case – for expansion or other financial reasons. Buying stock means, you are investing in that company with the hope of getting a return on that investment in dividends, or selling your stock at a higher price than you bought it.

Things to consider before buying stocks

Now that you understand what stock is, and are certainly excited to own a share of Samsung or Microsoft, you are probably asking the itching question, “How do I buy stock?” Well, there are few things to consider before buying stocks because you do not want to put your money where you will not get it out, I mean, investment means generating income and increasing value over time.

Price

You need to have accurate knowledge of the price of the shares you want to buy. Luckily, this information is publicly available for all publicly trading companies in the world. These prices are listed on different countries’ stock exchanges and legitimate financial websites for you to analyse and determine which to buy or sell.

If the price of the stock you intend to buy is within your budget, buy, and then look out for when it rises and then you can either sell for instant profit or just decide to hold them for better dividends. When there are indicators that prices are about to fall, most investors sell them so that they do not incur losses.

Liquidity

Stock traders, those invested in buying and selling stocks on a short-term basis, focus mostly on the stock that is actively traded. It doesn’t make much sense buying stocks that are quite dormant yet you need to make a quick buck on your investment.

Your interest lies in buying the stock at a relatively lower price today and sell high in a few days or hours for profit means that you need to focus on those with demand and supply.

Types of stock

Companies issue different types of stock depending on their needs and business policies. These include common stock and preferred stock. Common stockholders get privileges like voting in case the company is making decisions, but may or may not receive dividends. This is in direct contrast with preferred stockholders who receive relatively higher dividends but have no right to vote in case a company is making decisions.

As an investor, it is upon you to decide what is best for you. If you want to see the company take a certain direction and feel your vote can facilitate that, then the common stock is for you but if all you are after is the fat check at the end of the month or financial year, then the preferred stock is your type.

How do I buy stock?

At this point, you know what stock is, you know the different types of stock and I have taken you through things to consider before investing. You have probably checked out the price of Google on the New York Security Exchange (NYSE), and feel you can get yourself a few shares, so now your question is “How?”

To buy stock, you need stockbrokers 

Stockbrokers are people who are licensed to represent you to the company selling the stock. It is through these people that you buy stock. Stockbrokers are also essentially your investment or financial analysts and advisors who lookout for the best deals on the stock exchange for you to invest in.

You can buy stock either as an individual or as a group, something we want to call financially as an “investment club.”

Types of stockbrokers

Stockbrokers come in different types providing different services on top of being your representatives in the stock market.

Check out with your country’s stock exchange regulator to find out the registered and licensed stockbrokers so that you deal with legitimate companies. In Uganda, the Capital Markets Authority (CMA) lists 23 licensed stockbrokers at the time of this writing. These include traditional banks and investment clubs.

With the internet becoming a big part of our lives and playing a big role in how we live our life including conducting business, there has been a breed of stockbrokers that conduct their business exclusively online. These can be either full service or discount brokers. Your choice for a stockbroker will depend on your needs and capital.

Full-service stockbrokers will take care of every aspect of your investment, providing full board brokerage services with incentives like financial advice on how much to invest where, new profitable investment opportunities, healthcare, taxes involved and insurance to cover any risks involved. These are usually expensive so your budget that will determine the number of services they will provide you.

Another type of stockbrokers is discount brokers. These will provide you with tools like mobile apps, several tutorials about how to trade wisely, and they most times provide a platform on which you will do all your trading. Their main purpose is to provide you with the tools and well-researched stock market information you need to make your own investment. These can also incorporate an automated algorithm to predict market conditions and provide you with trading options for you to choose from.

How do I pay for stockbrokers?

Stockbrokerage is a business – meaning that – those involved will provide their services at a price. Either this price can be a small commission-based percentage of your transactions after buying or selling stocks when you use their tools and advice, or a share on the profit made after such transactions.

Some stockbrokers will ask for a fixed share of the assets they manage on your behalf, depending on how big your investment portfolio is.  

Stock investment is profitable but risky, that is why it is advisable to diversify your investment portfolio and not put all your money in stocks of one company, or one industry, or in simpler terms, don’t keep all your eggs in one basket.

Types of investment

Almost every industry has a company listed on the stock exchange, though tech companies seem to be the most valuable. Speaking of value, “valuable investing” is one type of investing where the company you are buying stock from is already big and well established, but its share price has more or less reached its peak. An investor buying stock in this company is sure their money is in a safe place, and will most probably stay valuable.

On the other hand, there are companies with new products and innovations with room and potential for growth. These companies might be start-ups with completely new products that have taken the market by storm, or companies that have existed or some time but come up with new products that have sparked global demand, say a pharmaceutical company discovering the cure to COVID-19. Investing in such companies is called “growth investment,” and the investor expects to get high profits in the long run.

One last thing, legitimacy of stockbrokers

As I said earlier, you will need a stockbroker to do this kind of business because these people have a deep understanding of the stock markets, can predict price fluctuations and advise accordingly, as well as providing informed advice on where and when to invest.

You will need value for your money so you should always make sure you lookout for the legitimacy of a stockbroker before having them handle your business. How accurate is the information they are giving you? How fair is the price of the stock they are trying to sell to you, and how easy is it for you to withdraw your earnings?

All that should be put into consideration before hiring stockbroker. You surely do not want to spend your hard-earned money with fraudsters because they do not care how hard you worked for that money, but you should. 

Congratulations, you have made it to the end of lesson one.