The reasons people invest in stocks and bonds are as varied as the investors themselves. Regardless of your reason for investing in either stocks or bonds, the method of investing in these types of securities follows the same basic pattern of determining your investment objectives and temperament, researching your investment and placing your buy order through your investments broker.
1. Determine what you want your investment to do for you, and decide how comfortable you are with different levels of risk. Stock investments may provide opportunities for capital appreciation if the market price of the stock increases. Some stocks may provide regular income through the payment of quarterly dividends. Bonds may provide a steady stream of predictable income through regular interest payments. Bonds may also appreciate in value if prevailing interest rates decline or if you buy the bond at a discount from its face value.
2. Research your prospective stock or bond investments prior to making any investment decision. All investments in stocks and bond involve risk, but some stocks and bonds are riskier than others. Contact the investor relations department of the company that issues the stocks or bonds that you are interested in and request an annual report. Determine if the company's performance coincides with your investment objectives and temperament. Make sure you understand the risks involved with each investment and are comfortable taking that risk before making any investment. If you are uncomfortable or do not feel qualified conducting your own research, you may wish to engage a full service investments broker.
3. Open an account with an investments broker. There are three primary types of brokerage firms, including full service brokers who can advise you every step of the way, discount brokers that provide limited customer service, and online brokers that allow you to make all of your own investment decisions without providing any personalized service. Expenses are typically higher for firms that provide greater levels of service. You will be required to provide your personal information, including your name, address and taxpayer identification number or social security number. Brokerage firms typically require an initial deposit, although the amount of the deposit may vary significantly from firm to firm.
4. Enter your buy order with your broker. There are a number of different types of buy orders, but the most common types are market orders and limit orders. A buy at the market order is an offer to purchase a specific number of shares or bonds at what ever price is offered on the open market. A buy limit order specifies the highest price you are willing to pay for the stocks or bonds. This order will not be filled if the market price is above the limit you have set.
- It may be difficult for individual investors with limited funds to obtain a sufficiently diversified investment portfolio by purchasing individual stocks and bonds. Consider investing in stock or bond mutual funds to gain both diversification and professional management of your investments.
- Investments in stocks and bonds involve risk. These types of securities are not insured by the Federal Deposit Insurance Corporation or any other U.S. government agency. You may lose some or all of your investment. Past performance is not a guarantee of future results.