Making Your First Shares Purchase
The day you make your first shares purchase will be one of the most significant days of your adult life. Most first time share deals will be relatively small but signify the beginning of a new era in one’s life. Whether you trade in person or online, making your first shares purchase can be a bit intimidating. When you know what to expect you will feel more confident and your first investment experience will be much more positive. What to expect is what I’ll cover in this article.
Contents
Working with a Stockbroker
If you are dealing shares with a broker, he or she will most likely walk you through the process. You can expect that if you have not already opened an account, you will need to do so. This entails providing quite a bit of personal and financial information to the stockbroker. There are a few reasons that they need so much information. For one, it is required by law. Nearly all financial regulatory bodies have adopted some sort of Know Your Customer (KYC) law, which states that the financial entity must make every effort to collect accurate information. This is usually done by checking your identification such as a driver’s license, government issued I.D. or a passport. They must have some way of verifying your true identity and falsifying this information can lead to criminal charges. This information is used to dissuade money laundering and to ensure that investment vehicles are not being used to fund terrorism or aid terrorists in moving money.
The broker must also learn about your financial background and investing experience. If your stockbroker is offering advice, or in some cases, even making trades in your account for you, then he has a fiduciary responsibility to ensure that he is making recommendation or trades with your best interest in mind. If he does not have proper information, it would be difficult to provide you with the best recommendation based on your specific situation. If you are paying your stockbroker to provide recommendations or to trade in your account, you should be at least slightly concerned if he is doing so without getting to know you and your financial situation very well.
Once you and your stockbroker agree on your first share deal, the process will be quite fast. You must confirm your desire to purchase a stock. The broker will then place the order, and within seconds the trade is made. You will then receive a confirmation and must settle your account.
Working with an Online Stockbroker
If you are working with an online stockbroker rather than a live person, the process is still similar. In creating your account, you will be required to provide personal and financial information. You may be required to provide copies of documents in order to prove your identification. Financial information will still be collected; however, it may not be as in-depth as when you are dealing with a live stockbroker. Since you will not be receiving direct recommendations, the online stockbroker will not be responsible for each individual trade. They will however, require additional information if you would like to engage in higher risk trades such as those on margin, options trading, commodities and others.
With your account open, all that is left is to purchase your first shares. Assuming you have already done your research and chosen the company in which you would like to invest, you only need to decide when and how many shares to purchase. For most online stockbrokers the process is similar. You can check a stock by entering either the name of the company or the stock symbol into a search box. This will pull up information such as the current stock price, most likely along with additional information such as recent and historical pricing, financial information, charts, news and analysis. There will also be an option to purchase shares. When you choose this option, you will need to enter order information, such as the number of shares you wish to purchase and the type of order. If this is your first share deal, you should just enter a market order that is good for the day (this is the default for most orders). This means that you will be buying shares at the current market price, which may be different than the quoted price because of delays, and if the order is not filled today, then it will be cancelled. However, for all but the most unusual purchases, the order will be filled nearly immediately.
Consider a Mutual Fund or EFT
Another thing that should be considered if this is your first share deal is whether purchasing an individual company’s stock is the wisest investment. Stocks can be a great long-term investment, but owning stock in one individual company rather than several quality stocks is risky business indeed. While it is very difficult to purchase a well-diversified portfolio of stocks at one time, it is quite possible to begin building a diversified portfolio even with your first stock purchase. The best option in this case may be to purchase shares in a mutual fund or an exchange traded fund (ETF). We cover these investments in detail in our chapters on Mutual Funds and ETF’s, but the reason these are such a great option as a first shares purchase is they are already well diversified.
A mutual fund is a collection of individual stocks. These stocks are chosen and managed by the fund’s manager, who buys and sells shares as he sees appropriate. The advantage is that by purchasing one share in the mutual fund, you actually own tiny fractions of shares of possibly hundreds of different stocks. That way, if the shares of one company were to fall for any reason, the rest of the portfolio would be less affected. Of course if the market as a whole is falling, then the mutual fund will follow suit, but that is to be expected when investing in the stock market.
Exchange traded funds are similar in that by purchasing one share of an ETF, you will actually have small fractions of a share of many different companies. The difference is that ETF’s are created by a manager and then left alone. There is no active trading involved in the ETF and the stocks owned by the fund do not generally change. The advantage that exchange traded funds have over mutual funds is that mutual funds tend to be a little more expensive since they are actively managed. There are trading fees and management fees that can eat away at the gains that the fund makes. However, some will argue that the active management of the mutual funds will result in higher returns. In reality, both are good options with proper research. The key is to find a fund that has companies that you would like to invest in while keeping expenses low. Not always as simple as it sounds but there are definitely a lot of great options available.
It truly is a great feeling when you have made your first shares purchase and you realize that you are now a shareholder in a company or a fund. By making your first share deal, you are taking a step in the direction of setting up your financial future and that of your family. A very proud day indeed! BuyShares.org congratulates you on the wise decision!