Making Your First Stock Purchase

You’ve come a long way from the day you first decided, “hey, I think I want to buy some stocks!”. You’ve read up on the terminology, spent a great deal of time researching individual companies, and registered an account with an online brokerage and deposited some money. You’ve been following the price movement of the company (or companies) in which you want to invest, and the time is finally right to make your first purchase. However, now is not the time to get all excited and dive in head-first.

One of the bigger mistakes that beginners make is investing their entire allotted amount at once. For example, say you want to buy $5000 worth of Coca-Cola shares. You find a nice entry point price-wise and go all-in, investing the entire $5000. But then something bad happens: the share price drops instead of going up like you had hoped. Now you’re looking at an unrealized loss and you’re stuck with it unless you decide to sell and take the loss or just wait it out. There is a way to soften the blow here: instead of spending the $5000 all at once, buy your shares in installments.

Keeping with the example above, your plan is to buy $5000 worth of Coca-Cola. But this time, instead of spending the entire amount up-front, you’re going to buy $2000 worth at first, then another $2000 worth down the road, followed by the final $1000. This way you can help offset some of the risk involved—if the stock price drops after you make your initial purchase, your second round of buying will not only net you more shares than you originally thought, it will also lower your average purchase price per share, making your break-even point lower, meaning you have less of a climb to make before you’re back in the black. At the end of the day, you were always planning to invest the $5000. Buying in installments can offset some risk and you may actually wind up with more shares than you would have originally purchased.

Another tip for new investors is to use limit orders instead of market orders. This means that instead of submitting your order to buy the shares at whatever the current asking price is, you set a price limit, the highest you are willing to pay. This strategy is particularly effective when dealing with lower-priced stocks—the difference between a few pennies per share might not matter much if the stock is $400/share, but if the stock is $4/share, a few pennies will add up quickly. Place your order, be patient and wait it out. As much as you want in on a stock, there will be someone else out there equally desiring to get out.

One final piece of advice to our readers: try and keep some cash in your account at all times. I know it’s very tempting to go ahead and pull the trigger on stocks that you like if you have the cash on-hand, but sometimes there are broad market events that, while might appear disastrous on the surface, actually present excellent buying opportunities. For example, in mid-August and early-October of 2011, the broad stock markets had a couple of severe down-days. This was reflected on virtually every stock—pick a stock and check the chart, you’ll like see big dips in the stock price during these short timeframes.

You’ll also notice that in most cases, the stock prices quickly rebounded back to their previous levels. If you had money in your account during these times, you would have been able to buy shares at an extremely discounted price and make a nice, quick profit. It takes some serious stones to be able to buy when everyone else is selling, but history has shown that what goes down will go back up. These “flash-crashes” happen sporadically throughout the year and if you have the money (and the stones) to buy during these opportune moments, you will very likely reap some considerable rewards.

Now that you’ve reached a status that very few ever achieve, it’s time to remind yourself that your work is never done in the stock market game. Just because you’ve bought your shares doesn’t mean you can sit back and watch the money roll in. Continue reading our next feature, “I’m In, Now What?” for tips on further maximizing your profits.

About BestOnlineTraders

The goal of BestOnlineTraders is to help new investors get off on the right foot. We don't claim to have all the answers to all the questions, but we feel like this site is a great place to start out if you are new to investing. The stock market is a complicated, intimidating entity, complete with complex terminology and calculations. As a new investor, your goals should be to get a grasp on the basics--the fundamentals, if you will. This is what we offer our readers.

There are many sites out that that are packed with information. The problem is that for the new investor, this can be information overload and overwhelming instead of educating. Start slow. Read our introductory articles, browse our online trader reviews and you'll be off to a good start. You will then be ready for more thorough discussions of the more complex aspects of investing, and we have some excellent links right here to help you.

Thanks for visiting, and good luck!

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