So you've finally done it... scraped every last cent you could out of the couch, dug out every stray suit/pants/jacket pocket for that rogue tenner, fiver or even a few loonies. You killed the piggy-bank and robbed the car of all your parking metre money.
Your account is open and funded... now what?
The next part is deciding what to buy. My first pick? Apple. (AAPL:Nasdaq) It was early 2005 and I could only afford 5 shares! But I saw what was happening with the iPod and how all my nerd friends were snapping it up. To me it seemed clunky, fragile and prone to breakage with crazy short battery life. But I could see where this might be taking us. Remember this was back in the day when peer-to-peer file-sharing programs were very new, very cool and very off the radar. Anyway, I held onto my apple until I couldn't stand it any more... Last year at about this time, (feb-2010) I saw this huge runup couldn't possibly last much longer and that the market would eventually come up with a proper valuation for Apple and I sold for a tidy $1500 profit. Not bad on less than $500 investment. Looks like I should have waited on that one as they are now $340 or so each and the company numbers look good for more gain.
Back to the hard part: what do I want to buy? This is a tough question depending on what your investment goals are. If you're looking for income or growth or some combination of the two, or even if you're looking for 100% safety of your money even if you "lose" value relative to inflation.
My recommendation for beginners? Any of the Canadian big banks. (Full disclosure: I own small positions of Royal (RY:TSX) and Scotia (BNS:TSX)) Why the big banks? Canada has perhaps the most conservative banking rules on earth, so they aren't about to invent crazy/stupid/insane ways of slicing pennies and selling them for thousands of dollars like the banks in America did leading up to the financial "collapse" of 2008. (The straw that broke the camel's back in America was really the "sub-prime" mortgages that were given to people who were hopelessly under-qualified to make the payments when the bait-n-switch low interest phase of the mortgage ended and the real rate began) The Canadian banks survived this crisis completely intact and they still were able to distribute the same amount of profit to their share holders. (They didn't raise the payouts of dividends though, but they did keep paying the same amount.) They all took a tumble for the share price, but this was completely wack. They continued to make billions of dollars in profits from fees and interest charged to us consumers. We have few banking options in Canada so they are essentially free to charge us whatever they want for banking, and we have no choice but to pay it. So why not own a piece of the bank and get that money back? Or buy a few more and get a bit of profit?
The valuations (share price) of the big Canadian banks will go up and down a few dollars this way and a few dollars that way, but over time they will continue to prosper (at our expense) and will continue to pay profits to the share holders (in the form of quarterly dividend payments ranging from $0.50 to $0.70 per share)
Example: Say you own 100 shares of BNS and if you bought them a year ago (Mid January 2010) it would have cost you $4500. Every quarter (every 3 months) they pay $0.50 per share in dividends. So you would have had $200 cash deposited into your brokerage account. AND today BNS is trading at $56+ per share. Thus the value of your investment will have increased to $5600. So your investment has paid you $200 cash and gone up in value $1100 for a grand total of $1300. What does that mean? This is a 29% return. Compare that to the interest rate you get on your savings...
CAUTION: you can't be spooked though if the value goes down. I think it's safe to stay the course with any of the Canadian big banks though, but there are some tricks I'll discuss in a future post to help ease your fears. Example: had you bought 100 shares in February 2008 it would have cost you about the same $4500. However in February 2009 your 100 shares would only be worth $2500. (You would have still received $200 in dividends though) However, you only "confirm" your loss if you sell. If you had stayed the course and waited 2 years you would full recovered and back up to the previously mentioned profit. (Actually it would be $200 higher thus being a 33% gain from your investment of $4500.)
So you've made your pick yet? Great! Now login to your brokerage account and there should be a "trade" button or an "order entry" page or something to that effect. You will have to tell the system what you want to do either "buy" or "sell" (yes you can sell shares you don't have! Watch out! It can bite you if you do it wrong... It's called a "short sale" and should only be used if you expect the value of that company to go DOWN!) and tell it how many units (shares) you want to buy. AND you will have to tell the system what stock exchange you want to buy it from. NB: some companies are listed on several exchanges so be careful here.) The last important part of the order is the Term. This tells your brokerage how long you want the order to try and make your purchase. (Up to 30 days away)
IMPORTANT: there are "market" orders and "limit" orders. I strongly recommend that you set your buys and sells as a "limit" orders for nearly every trade. Markets have many sellers and buyers all electronically haggling for the best price. A market order will buy from whomever is selling at nearly any price they want. So depending on the time of day or depending on how many shares of a company are being traded you might pay a bit or a lot of a premium.
This however isn't much of an issue with the big banks since millions of shares trade daily and all of them go for very very close to the market price. But still, get a real-time quote from your brokerage just before you buy and then enter that number as a limit and you won't be surprised.
So you've entered your order, make sure to click the "preview" button if it has one. Most brokerages default to order preview anyway so you can double check you're going to get the stock you want, on the exchange you want at the price you want. Once the system gives you the preview, click "submit order" and boom! If you've entered this order during open hours (9:30am-4:00pm EST) the order will hit the market almost instantly. Click the "order status" button if you're not already presented with a "fill"confirmation. (fill = your order has been filled)
Typically it's best to buy in chunks of 100. It's called a "board lot" and they fill fastest and get the best price with the lowest exchange fees. (Your broker will thank you and absorb them as part of the commission or at Quest, they tack them on to the commission fee... Don't worry though, exchange fees are only a few cents per order for the small fry orders you'll be making as a starving artist!)
That's pretty much it really. Now if you check your account you'll see that your cash balance should have gone down by the order amount (but the commission won't get deducted until after close) and your "buying power" will have gone down. Your "settlement date" funds however will still be in tact. All trades take 3 business days to settle. This gives your broker time to do the paperwork to register you as a shareholder with the company you just bought. So watch out! If you buy too close to the date of a dividend, you might not get it if your trade doesn't settle before the indicated date for "shareholders on record". Sometimes depending on the company you often see spikes or dips in share price before and after this date as some investors try in swoop in, own the stock for 3 days and get out with the dividend without having to own the shares for any length of time. (This actually can be very profitable if you can borrow money cheaply and can get in and out without a loss... more on this in a future post).
So that's it really! You're now the proud owner of a big bank or a widget company or toothless-joe's manure haullage inc.
Recommendation: almost any Canadian portfolio can stand to have a big Canadian bank in it. Pick your favourite and buy. They all pay steady dividends and weathered the financial disaster of 2008 well, and are back on the road to billions of profits every year. Buy some of them and get a slice of that. You can't go wrong. (Unless you sell too early, or enter your order backwards! I've sold too early so now I'm holding. It will return to profit eventually and while I wait I'm still collecting the lovely dividend.) My favourite is BNS. Royal is a good buy now too since they had a few disappointments lately.
Next time: saving your bacon!
The STOP-LOSS order
Should you cut and run?
Should you hold and hope?
Disclaimer: by having read any of my blog you immediately waive your right to sue me for any reason whatsoever. If you do try to sue me for my advice, you have to immediately agree that you are wrong, will pay for my legal fees and will pay me a settlement of $1,000,000 for wasting my time. My advice is entirely my opinion. I have made gains AND losses trading stocks. (Thankfully I've made more than I've lost! That's why I'm here trying to help you noobs.) If you take my advice and lose your shirt/dog/wife/house/car/everything don't cry to me about it. You've waived that right. Stand up and take some damn responsibility for your own actions already! (The insurance companies are getting tired of this... that's why insurance has gotten so expensive in the last few years... that and lawyers)