A Beginner’s Guide to Investing in Stocks

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

There are typically four major ways to invest:

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:

1. Common stocks – ownership of businesses
2. Preferred stocks – special types of stock that often pay high dividends but have limited upside
3. Bonds – corporate bonds. municipal bonds. savings bonds, U.S. government treasuries, etc.

4. Money markets – highly liquid funds that are designed to protect your purchasing power; considered to be a cash equivalent
5. 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.
6. 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:

1. 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.
2. 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.
3. Proxy statement – includes information on the Board of Directors as well as management pay and shareholder proposals
4. 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.
5. 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 before you buy an ownership stake in a company by investing in its stock. These three are:

They all work together and reinforce one another so you cannot study them in isolation or you will find yourself making decisions based on partial data; a mistake that can be costly, especially when you decide to invest in stock rather than a more senior security such as a bond.

How to Invest in Stocks — Some Other Tips and Helpful Resources for New Investors