Investing in stocks was once an insurmountable obstacle which individual and amateur investors were unlikely to overcome. Due to technological advances such as broadband and the Internet, individual investors who did not have access to the same information, technical analysis, and ability to purchase stocks as full service brokers now have that opportunity.
In order to purchase shares of stock in a publicly traded company there are two main avenues to facilitate a stock transaction: full service brokers and discount brokers. Full service stock brokers, as the name implies, not only provide a wide range of financial services but more importantly provide one on one interactions with a human being. For individuals with neither the time nor the inclination to research stocks prior to purchase a full service broker may be the way to go.
Discount stock brokers, which used to be brick and mortar operations just like full service brokers, have shifted completely to an online Internet based presence. For individual and amateur investors not afraid to take a risk and make financial decisions on their own, discount brokers may possibly fulfill all stock purchasing needs. Internet based discount brokers often provide significant resources for stock analysis and research which will aid the decision-making process.
Regardless of whether you decide to purchase through a full service broker or an Internet based discount broker there are other considerations they need to be taken into account when investing in stocks for the first time. Risk aversion and asset allocation are two important concepts to understand when purchasing stock.
Risk aversion is an understanding of an individual's level of risk they are willing to assume when owning an investment. High flying, base jumping, speed racing investors who have a high tolerance for risk and may be more likely to purchase a single risky tech stock in hopes for a big return. If however, you want to preserve capital, generate income but still get a decent return then a lower risk portfolio may be more appropriate for an individual investor.
Asset allocation works hand in hand with risk aversion because if an investor is more risk averse and wants to preserve capital they may decide to purchase a collection of various blue chip large cap stocks in addition to bonds and certificates of deposit so if any one sector or instrument drops significantly the overall portfolio isn't as negatively affected. Asset allocation can also be characterized as portfolio diversification meaning that all an investors eggs are not put in one basket.
Stocks can also be purchased via a mutual fund. Mutual funds are highly recommended for first time individual investors because they allow the same exposure to investing in stocks under a more controlled diversified environment managed by a qualified professional portfolio manager. Mutual funds also allow for dollar cost averaging by making incremental monthly purchases which allows for more mutual fund shares to be purchased when prices are down and less to be purchased when prices are up.
A important point about investing in stocks is the consideration of an investor's time horizon. All investments are cyclical meaning they will go up and down based on macro and micro economic influences. When purchasing stocks, it is always recommended to take a long-term investment perspective because trying to time the market, which many people have said they can do, has been proven not to work. Short term or day trading inevitably loses money and is not recommended for individual, amateur or first time investors.
Investing in stocks can be both fun and rewarding and is an important part of a diversified investment portfolio. As with all investments however, stocks can lose money and possibly become worthless should a company go bankrupt so only invest what you can afford to lose. Research, patience and diversification can all help minimize risk but cannot eliminate risk completely. Stock investing may not be for every one but for those individuals who want to purchase stock it has never been easier.