Buying your first stock is a big milestone, and sometimes it can feel like a risky leap out into the unknown. This aspect, unfortunately, scares many people away, causing them to remain right on the verge of investing without ever pulling the trigger. To help you get past this important milestone in the most successful way possible, here are five important steps to investing in your first stock. Follow these and you’ll be well on your way to becoming a successful investor.
Step 1: Understand the business.
Before you even consider buying stock in a company, you need to learn everything you can about the company itself. Take the time to research their history, their market, their competition and more. Ideally, you will want to invest in a company that you already have some level of familiarity with. The better you understand a company or an industry, how they operate, their outlook, etc., the more informed you will be about whether or not they are a good buy.
Step 2: Make sure it’s durable.
The best stocks are the ones that you can hold onto for a long period of time, profiting off of them more and more as the years go on. In fact, Warren Buffett takes it a step further, saying, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” When choosing a company to invest in, you should have a 10-15 year outlook. It’s crucial, therefore, to make sure the company is durable enough to remain profitable for that long.
Imagine what the market is going to be like in 10-15 years. Can you foresee the company you are considering still being successful for that long? How well have they done adapting to changes in the market over their history thus far? Carefully considering questions such as these can help you determine whether or not a stock is durable enough to remain valuable over the 10-15 year outlook investors should have.
Step 3: Make sure the company is run by a CEO with integrity.
Companies live and die by their CEOs. It’s not uncommon at all for a great CEO to take a struggling company and completely turn it around. By the same token, it’s also not uncommon for CEOs to embroil their company in scandals and mishaps, causing the stock to tank. Just look at what happened to Volkswagen stock in 2015 due to the poor integrity of its CEO and upper management. To avoid such pitfalls, be sure to invest in a company that is run by a CEO with integrity.
How do you tell if a CEO has integrity?
Start by reading the letters and reports they send out. These documents should be honest and upfront through the good and bad, and they should never come across as if they are trying to deceive the investors. It’s also important to take a look at a CEO’s salary and make sure that they are taking a salary that is comparable to their performance. Lastly, take the time learn everything you can about a CEO and their past. Ideally, a great CEO’s record will be squeaky clean.
Step 4: Determine the value of a business and make sure it is on sale.
Value and price are not the same thing. Another great lesson from Warren Buffet (quoting Benjamin Graham) is, “Price is what you pay; value is what you get.” Sometimes, the market will drastically inflate the price of a business above its real value. Other times, though, the market will drive the price of business well below what its actual value is and these are the stocks you want to buy.
So, how do you determine the value of a business if its current price isn’t a real indicator? One way to do this is to calculate the business’s margin of safety. This calculation enables you to determine what price the stock needs to be in order for you to safely make a 15% return over a five-year period. If a business is priced below the margin of safety price that you calculate, then it is on sale and is likely a good buy. To calculate the margin of safety for a business, check out this detailed explanation.
Step 5: Open a brokerage account and get started.
Having learned everything you can about a business, ensured it is durable enough to last 10-15 years and that it is run by a CEO with integrity and, having made sure that it is priced at or below its margin of safety, all that’s left to do now is jump in and buy your very first stock. To do this, you are going to need to open a brokerage account.
For beginner investors, the most important consideration for which brokerage account you choose is the fees that they charge. Once you’re more experienced, you may be okay with paying higher fees for a brokerage account that gives you more options. For now, though, any account that lets you buy and sell stocks will work nicely, so the cheaper the better. You’ll also want to take a look at the minimums each brokerage requires you to have in your account, as this may or may not be important to you, depending on how much you are willing to invest.
Read more: 5 steps to buying your first stock