When you buy shares, you are buying ownership in the company that issued the shares. As the owner, you have several rights. For example, a stock investor is entitled to receive dividends if the company generates sufficient income. Investors can also sell their shares and get financial benefits. You can buy shares of a specific company, or buy a stock mutual fund.
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Part 1 of 3: Studying the Stock Market
Step 1. Learn how the stock market works
The stock market works like any other market. In this case, the product being traded is part of the ownership in the company. We call this part as stock. Shares are traded on the stock exchange. You can think of the stock market as a market. In the United States, major stock exchanges include the New York Stock Exchange and the National Association of Securities Dealers Automated Quotation system (the NASDAQ).
- Stock prices move up and down depending on supply and demand. When there is a lot of demand for a particular stock, the price of that stock will go up. Since there are more interested buyers than sellers, the stock price will rise. When there are more sellers than buyers, the price will fall.
- The stock price is a reflection of the investment community's opinion about the stock. The price does not always reflect the true value of the company. This means that short-term prices are often influenced by people's emotions, not facts. Prices can move based on true information, misinformation, and gossip.
- Your goal as a stock investor is to buy shares of a company whose value will increase over time. If the stock issuing company can increase its sales and earn more profits, investors can buy more of its shares. If the stock price increases, you can sell your shares and make a profit.
- For example, imagine that you buy 100 shares at a price per share of Rp. 1,500. You invest Rp. 15,000. After two years, the share price increased to Rp. 2,000. Currently, your investment is worth IDR 20,000. If you sell your shares, you will get a profit of IDR 5,000 excluding any fees or commissions (IDR 20,000 – IDR 15,000)
Step 2. Learn terms related to buying and selling stocks
These terms will help you decide exactly which buy or sell order you want to issue to your stockbroker. These terms allow you to have certain conditions in your order to sell or buy shares.
- The purchase price, also known as the offer, is the lowest price you can get when you want to buy company stock. Say you want to buy IBM stock. If the purchase price is IDR 50 per share, you will pay IDR 50 for the shares you purchased.
- The ask price (commonly called the bid) is the highest price you can get when you attempt to sell a stock. If you own IBM stock and wish to sell it now, you will receive an asking price per share. If the ask price is Rp49.75, you will receive that price per share.
- A market order is an order to buy or sell a share immediately at the best price available on the market. If you issue a market order, you will pay the purchase price as a buyer. If you sell, the market price you receive is the ask price. Keep in mind that your market order can be executed at a higher or lower price than you expect. A market order is guaranteed to be executed immediately upon issuance, however its price cannot be guaranteed.
- In addition to market orders, you can execute other orders conditionally on your buy or sell price. A limit order, for example, is a request to buy or sell shares at a certain price or a price better than the current price. On the other hand, a stop order is an order that becomes a market order as soon as the stock reaches a certain price. You should consult a broker who has a certificate for buying and selling shares. Ask the broker if these different types of buy-and-sell orders are the best for you.
Step 3. Consider buying a mutual fund
A mutual fund is a collection of funds provided by many investors. This pool of funds can be used to purchase various types of investments. You can choose mutual funds that invest in various companies. When you invest through a mutual fund, you own a share in the various shares that the mutual fund buys. Mutual funds can be an alternative investment that is lower risk than buying your own shares.
- Investing in mutual funds can lower your investment risk due to diversification. If you invest in only one stock, your risk is concentrated in one company. On the other hand, mutual funds can hold dozens (if not hundreds) of stocks. If the value of one type of stock decreases, it will have little impact on the value of your overall investment.
- If you are just starting out, mutual funds can be a great way to invest in stocks. Choose a mutual fund if you are unsure about investing in a particular stock, or if you don't have enough time to research and manage a stock portfolio.
- Pay attention to the fees charged by mutual funds. Keep in mind that you will pay a professional financial management fee in a mutual fund. For example, you may be required to pay a selling fee when you buy or sell your mutual fund. Mutual fund investors will also pay an annual fee for financial management and mutual fund management. This annual fee is based on a certain percentage of the assets managed by the investment manager.
- Say, for example, you have Rp. 10,000,000 invested in a stock mutual fund. If the annual fee is of 1% of assets, your annual fee is IDR 50,000.
Part 2 of 3: Researching Stock Purchases
Step 1. Learn to research investments
If you decide to buy individual stocks instead of a stock mutual fund, you should do your research first. There is a lot of data available on the Internet. Finding useful data can be a little tricky. There are several tools you can use to analyze and select stocks.
- Information about stocks can usually be found on the company's website or in their annual report. Both sources can provide valuable information about the company's business model and their financial statements. In addition, the company regularly prepares presentations for investors. These presentations are often presented in an easy-to-understand format. Study these documents before making an investment decision.
- Sites like Morningstar.com are also useful. New investors may feel confused when reading quarterly or annual reports. By searching for a stock on Morningstar, you can get important information about a company, such as a balance sheet, income statement and cash flow statement. Morningstar also provides financial ratios that can help in analyzing the company. This site is easy to browse and understand.
- Do a Google search for news about the company in question. Read the latest news that describes the company's performance. The news source should be an independent third party, so that the information provided is not biased.
Step 2. Find an attractive company
The first step is to find a company to research. To do this, read newspapers, magazines, and investment sites like the Wall Street Journal or Investor's Business Daily. In addition, sites like Stockchase.com can provide input on stocks that analysts rate well.
- Start by investing in blue chip stocks. Blue chip stocks are shares in large and well-known companies with good track records and making profits. This company is a company that is usually easy to spot. They produce goods and services that consumers are familiar with and buy. The company's stock price usually grows steadily over the long term.
- Although these companies are still risky for investors, they are more stable than other companies. Blue chip companies tend to have a large market share in the markets in which they operate. The company has good funding sources, and has a competitive advantage.
- Blue chip stocks for example are Wal-Mart, Google, Apple, and McDonald's, and many more. Think of the companies you rely on for goods and services.
Step 3. Choose a business that is performing well
When you find a good candidate, you should check some of the company's financial indicators. Compare these indicators with rival companies to see how the two companies compare. Several specific indicators are widely used to calculate the investment value of a company.
- Look at the company's profit margin. Profit margin is defined as (net income)/(sales). For this discussion, net income equals profit. This indicator explains how much profit a company gets for every dollar of sales. A business always wants to achieve higher profit margins. If a company earns 10 cents per dollar sold, for example, the profit margin is (.10)/(Rp1), or 10%.
- Perform an analysis of the return on equity (ROE)). Equity refers to the total money invested by all shareholders of the company. Return on equity shows how well a company is using its shareholders' money to make a profit. This ratio is expressed as (profit)/(shareholder's equity). If a company earns $100 in profit on $2,000,000 in equity, the return on equity is (Rp100,000)/(Rp2,000,000), or 5%.
- Look at the company's past and future growth expectations. Is the company steadily increasing earnings per share? This is a sign of a strong business that is likely to have a competitive advantage.
- Compare the company's revenue growth history with that of its competitors in the same market. See also the projected revenue growth over the next five years. If it is higher than its rival, then there is an indication that the stock price will increase in the future.
- Look at the company's debt. Well-managed companies shouldn't have more debt than they can afford to pay. One common way to analyze debt is to use the debt-to-equity ratio (debt-to-equity ratio).
- The debt to equity ratio is obtained by dividing the company's debt by the shareholders' equity. The lower the percentage, the better. If a company has $2,000 in debt and $4,000 in equity, the debt-to-equity ratio is (Rp2,000,000)/(Rp4,000,000), or 50%. Compare this ratio with the ratio owned by the company's rivals.
Step 4. Recognize the concept of value
You can think of stocks as machines designed for profit. If the machine works well and can bring in greater profits, the machine becomes more valuable in the eyes of investors. The most important financial ratios for stock value are those related to earnings.
- The most common way to value a stock is to use the price-to-earnings ratio (P/E ratio). P/E ratio is obtained from the company's stock price divided by annual earnings per share. This ratio is important to evaluate the value of the investment.
- Earnings per share shows the total income in rupiah divided by the number of shares held by the public. Shares held by investors are known as outstanding shares. For example, if a company's earnings are $1,000,000 per year and it has 10,000,000 shares outstanding, the earnings per share would be ($1,000,000)/(10,000,000 shares), or 10 cents per share.
- Suppose a company's shares are traded at a price of IDR 50 per share. If the earnings per share is Rp5, then the P/E ratio of the shares is (Rp50/Rp5), or 10. If an investor buys these shares, they will “pay 10 times the earnings”.
- If Company A is trading at ten times earnings (or a P/E ratio of 10), and Company B is trading at a P/E ratio of 8, Company A is more expensive than Company B. Note that “more expensive” has nothing to do with the stock price. The ratio is a reflection of how expensive the stock price is compared to its earnings.
Part 3 of 3: Invest
Step 1. Investigate the possibility of buying shares directly from the issuer
Some companies offer direct stock purchase plans (DSPP) that allow you to buy stock without using a broker. If you are planning to buy a small number of shares, this may be the best option for you. This approach saves you time and costs you have to incur if you use the services of a stockbroker.
- Do an online search or call the company whose stock you want to buy. Ask them if they offer a share purchase scheme. If so, the company will send you their schema prospectus, registration form, and other relevant information. A prospectus is a document that provides all important information regarding the purchase of shares.
- Many schemes allow you to invest a minimum amount of IDR 500,000 per month. Make sure what fees you have to pay. Some companies offer free investment schemes.
- DSPP also allows you to reinvest all your dividends automatically if you wish. Dividends are paid to you based on company profits. The company's board of directors must declare dividends in order for payments to be made.
Step 2. Choose a broker
If you can't buy the stock you want directly from the company, you'll need to find a broker. There are many brokerage firms that offer different services. This means you need to compare your options and choose the broker that suits you best. There are two types of brokers: full-service and discounted.
- Full service brokerage services are usually more expensive. Such companies offer their services to investors who are interested in receiving recommendations and guidance. The higher fees may be worth the service received, as full service brokers can provide valuable assistance. If you're not confident in your ability to pick stocks, or if you don't have enough time to research companies, consider working with a full-service broker.
- If you plan to make your own investment decisions, choose a full service broker. There's no point in paying more for a service you won't use. However, it's a good idea to look at each broker's offerings carefully to ensure that their offerings are in line with your investment goals.
- Look for full-service brokers on the Internet. Consider the costs, especially the additional costs that may not be mentioned when you contact a potential broker for the first time. Ask the broker to provide written details for any fees that may be charged to you.
Step 3. Open a brokerage and deposit account
Contact a brokerage firm to open an account. Your broker will ask you to fill out a new account form. This form contains your personal information, along with your investment experience and risk tolerance.
- Your broker must report your stock trade to the IRS. Income from the sale of stock, along with dividend income, will be reported to the IRS. You have to fill out the required form and send it back to the broker.
- Decide how to deposit funds into your brokerage account. Send some money as an initial deposit to your broker that will be used to buy your first stock.
- Enter the command. Tell your broker which stock you want to buy and the number of shares. When your purchase has been completed, you will receive a confirmation which will be considered as proof of purchase. Keep all your proof of purchase on file.
