Just more than half of all Americans invest in the stock market. It’s a platform for both personal and business economic growth that’s maintained a steady presence since the late 1700s.
With the proliferation of electronic tools that make trading far easier than before, more people are considering jumping into the stock market for the first time. Given its complexity and the number of investment options the stock market represents, it’s not always easy to figure out where to start.
Thankfully, you don’t have to begin with a full portfolio with multiple companies. You only need to start with one stock and build from there. But how do you decide what your first stock will be?
Don’t think of it as stock
Trading stock is a numbers game. All the front-end information stock buyers use to make decisions is shown in charts, graphs, and chains of statistics. It’s easy to see how this mass of information can be intimidating and hard for a first-time investor to put into context.
That’s why it’s helpful to think about your investment as a stake in a business — not just a “share.” You’re becoming part-owner of a company. Your funds are helping the company do what it must to stay competitive: research, marketing, materials, personnel. In exchange, you gain ownership in the business. This entitles you to earn money back on your investment, just like any business owner.
Thinking in terms of company ownership, rather than ownership of stock shares, orients your thinking toward evaluating what really matters about your portfolio. You’ll look for the qualities that make up a successful business and trends that dictate performance. That will help you as you pick more stocks in the future to expand your holdings and prepare you to analyze companies the way serious investors do.
Of course, you’ll want to keep an eye on your stock’s price fluctuations and outlook. But you’ll do so in light of other information that will be equally, possibly more, helpful.
Open an online brokerage account
Back in the ancient history of the 20th century, most everyday investors used professional stockbrokers to take their purchase orders, paying them a share of commission and subjecting themselves to their schedule and other clients. That’s no longer necessary.
Online brokerage accounts are how the lion’s share of American investors conduct their stock market transactions. To begin your investment journey, your first step is to open one yourself.
You have dozens of long-established brokerage companies to choose from: Fidelity, Merrill Edge, Charles Schwab, TD Ameritrade, and more. You also have newer investment companies that have built their entire business model on internet-based trading, such as E*TRADE, SoFi, and Robinhood.
While it’s inaccurate to say that all brokerages are the same, almost all of them have made efforts to attract more customers by simplifying how they work. All the top-rated online brokerages offer commission-free trading with no per-transaction charge. They also don’t have minimum balance requirements. Some offer promotions like cash credits to new users.
Broadly speaking, any brokerage with an online presence (which by now pretty much means all of them) will make trading painless and simple. Your choice depends on how much support you think you’ll need. It’s always good to consider a brokerage that makes it easier to research the companies you invest in, providing data and news on all companies with publicly traded stock and other tools to guide your investment strategy.
Set a budget plan
As a prospective first-time stock owner, you don’t have to make a lot of thought-out decisions on how to shift your funds around. You’re starting from nothing. But it’s always good to have at least some plan in mind before jumping into any new enterprise, including investing in the stock market.
The first question should be a least a little obvious: “How much do I want to spend?” This question relates to both the price of the stock you buy and how much you will be able to set aside for future investments.
There’s no minimum for entering the stock market. You can get shares in some “penny stocks” for $5 or less. But penny stocks are for small companies, most of whom haven’t established themselves in the marketplace yet and are risky at best, despite their low entry fees.
It’s far better for the first-time investor to set aside a more substantial sum of money and invest in a more reliable, established company as a foundation for future investments. Many experts recommend setting aside $200 for your first stock purchase. That’s a reasonable suggestion. You may not spend all that sum on your first stock, but it’s a good starting point.
This step is also an appropriate time to think about how much you’ll want to invest in stocks regularly. You may be prepared to add $50 a month to your online brokerage account. Perhaps you can only afford $10 a month. Maybe, right now, you can’t afford any new contributions — which is fine. But it’s smart to think about this scenario now, just to give yourself a framework to grow as a stock investor.
Stick with what I know
Once you’ve set rough goals for your stock investments, it’s time to start a list of companies that are attractive to you. As of right now, there are around 2,800 companies listed on the New York Stock Exchange (NYSE). They represent every business sector in the economy. How can you possibly start narrowing down your choices of all these industries for your first stock purchase?
The best rule of thumb for your first stock buy is to choose a business you understand. Find a company that offers a product or service you’re familiar with — one where there’s no ambiguity about the goods they offer their customers. Ask yourself what certain companies do, and don’t be concerned if the answer seems overly simplistic. It’s not a trick question.
Disney provides family entertainment like movies, cable channels, and amusement parks. McDonald’s provides fast food. General Motors manufactures cars. Apple and Microsoft make consumer technology. Old Navy sells clothes. Bank of America is, well, a bank.
It’s even better to choose a company based on your own experience or in a field in which you have certain expertise. If you’re a nurse, you may be familiar with a few companies that you’re exposed to daily — healthcare providers, pharmaceutical distributors, and so forth. If you work in software development, you may have direct experience with companies that make project management tools, platforms, communications networks, and other services.
In short: Select companies whose businesses you can explain briefly and confidently. Eliminate all companies you’re uncertain about, along with those you don’t like or respect.
Focus on famous brands
With your first stock purchase, you’re looking for a company with a proven track record. You want a company that’s established enough in the marketplace to give you a solid foundation to construct your portfolio around.
Far more often than not, this type of company is well-known to everybody, especially those who don’t invest in the stock market. Nobody doesn’t know who Apple, Walmart, Coca-Cola, Disney, Nike, and Toyota are. Those companies have existed for decades and retain dominant positions in the marketplace. You can expect that these companies will continue to thrive. They are, for all intents and purposes, safe bets for your first stock investment.
Consider stock in these companies as a nest egg. As your investments grow and you learn more about the stock market, you may be able to invest in smaller companies with exciting potential to go along with your initial stock purchase. But to start with, go with one of the big guns.
Eliminate the most expensive ones
Remember a few paragraphs ago when we suggested putting a cap on how much you want to spend on your first stock? Whatever amount you came up with, disqualify all stocks with shares over that amount.
This will eliminate a lot of attractive, highly successful companies. If you use the $200 limit, for example, you’ll have to cross Amazon, Alphabet (Google), Netflix, and Berkshire Hathaway off your list. As of now, a single share in all of those companies costs more than $1,000. However, you’ll still have a lot of big names left to choose from: as of December 2020, Proctor & Gamble, Apple, Microsoft, and Disney all cost less than $200 per share.
The main reason to eliminate ultra-expensive stocks is so you don’t tie up too much of your investment in one stock. Even if the priciest stocks continue to be successful — which is a fairly good bet — you’ll want to start with something you can afford right now.
Sure, if you happen to have $3,200 in disposable cash in your pockets right now, maybe you can go ahead and buy that single share of Amazon. But virtually no first-time investors have that kind of freely spendable cash. Stay under the cap you’ve set for yourself. You’ll have time for the bluest of blue-chip stocks down the road.
Get the financial report
You’re now at that point where you’re going to review the financial information for the companies on your list. As you’re no doubt about to discover, you’ll have a dizzying number of statistics and metrics staring right back at you. This can be intimidating, to say the least.
Thankfully, you don’t have to digest all these numbers when it comes to your first stock purchase. There are only two you need to consider upfront and only a few more that are extremely handy to have in case you’re torn between two or more companies.
First, you must access this information. There are a couple of ways to do this. Companies also usually make this information accessible on their websites, in whatever sections are reserved for “investor relations.” You’re looking for financial statements, which companies issue on both an annual and quarterly basis. This is a legal requirement from the Securities and Exchange Commission (SEC), as is the law that companies make these reports publicly available.
An easy way to access these reports is to Google your company’s name, plus “10-k” (the code for annual reports) or “10-q” (quarterly). For example, “Coca-Cola” + “10-q” sends you to a result screen with “Quarterly Filings (10-Q):: The Coca-Cola Company (KO)” right at the top of the page. That will lead you to a page where you can download years of quarterly reports.
Alternately, you may be sent straight to a financial report published by SEC.gov. It will have all the information you need, though it might not be quite as user-friendly as the graphs and charts on the company-specific site. For example, searching for “Apple” + “10-k” will lead you to the company’s latest annual report as filed with the SEC.
Look for a few financial indicators
There are scads of numbers on these financial reports. But for your first stock purchase, you only need to consider a couple since you’ve already narrowed your choices down to established companies with good track records. The first two most crucial indicators you’re looking for are:
- Revenue. This is how much money a company earns before deducting expenses. It’s usually the first figure you’ll see on a company’s income statement. Good companies show steady, dependable revenue growth over regular periods.
- Net income. This is how much profit the company declares after deducting expenses like taxes and operational needs. You’ll usually find this near the end of an income statement. Like revenue, net income should be consistent and dependable.
Beyond those two, there are a few other figures that can help break a stalemate as to what first company you want to invest in:
- Earnings per share (EPS). This is how much net income a company gains per each public share it offers. The higher this number is, the better.
- Price-earnings ratio (P/E). Very loosely defined, this figure is a measure of how valuable a company is for the price of its stock — it may be overvalued or selling for less than it’s truly worth.
- Return on equity or investment (ROE, ROI). This figure is a measure of a company’s profitability related to how much they earn related to their stockholder’s contributions. 15% is a solid ROE/ROI amount; the higher, the better.
Revenue and net income should be the big drivers in your first stock purchase. The other three ratios are good to know, but they should all be analyzed in the context of one another; no single one of them tells a complete story. They may be more important down the road when you’re expanding your portfolio after you’ve learned more about the stock market and grown more comfortable with it.
At this point, you should probably have one or two stocks that stand out above the rest on your list. With all criteria met, it’s time to pull the trigger. This is a painless operation with your online brokerage site. You can buy as many shares as you wish under your maximum cap — if your company costs $40 per share and your limit is $200, you can buy five shares.
You’ll want to keep a watchful eye on the stock. Don’t be too concerned if the stock price makes an occasional dip. The stock market can be a wild ride, and those who profit from it have learned to be patient and discerning through both strong and weak economic conditions.
Use your first stock to learn more about the stock market and how it works. Keep an eye on business news, follow its fundamentals, look for quarterly earnings reports, and understand what drives your company’s success. In time, you may be ready to expand your portfolio with confidence.
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