How to Invest in Stocks

Do you want to begin investing in stocks but have no idea where to start? This overview can help. It is designed as part of our Complete Beginner's Guide to Investing in Stock.

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

There are typically four major ways to invest:

• Through a 401k plan or, if you work for a non-profit, a 403b plan
• Through a Traditional IRA, Roth IRA, Simple IRA or SEP-IRA account
• Through a brokerage account
• 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:

• Common stocks – ownership of businesses
• Preferred stocks – special types of stock that often pay high dividends but have limited upside
• Bonds – corporate bonds, municipal bonds, savings bonds, U.S. government treasuries, etc.
• Money markets – highly liquid funds that are designed to protect your purchasing power; considered to be a cash equivalent
• 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.
• 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:

• The 10K – this is the annual filing with the Securities and Exchange Commission (SEC) and is probably the single most important research document available to investors about a company.
• The most recent 10Q, which is a smaller version of the 10K that is filed at the end of each quarter instead of each year.
• Proxy statement – includes information on the Board of Directors as well as management pay and shareholder proposals
• 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.
• 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:

• The income statement
• The balance sheet
• The cash flow statement