Investing 101 - How to Buy and Sell Stocks

<p>When it comes to investing in the stocks of public corporations, most Americans predominately buy mutual funds, which are professionally-managed investment pools in which you cast your lot with thousands if not millions of other small investors. Mutual funds are a great way to gain an instantly diversified portfolio for a relatively small initial investment, but some investors may want to venture outside the world of mutual funds and buy individual stocks.</p> <p><strong>The Advantages Of Buying Individual Stocks</strong></p> <p>What are some reasons you might want to buy individual stocks instead of a mutual fund? There are several.</p> <ul><li><strong>Higher Potential Returns</strong> - Mutual funds are great, but by their very nature tend to preclude the possibility of earning huge returns on your money. Since they often own hundreds of stocks, it takes picking more than a few huge winners to make much of a difference in the fund's overall performance. This is unlikely to say the least. By buying individual securities, you have the ability to buy only those stocks that offer the most promising returns relative to their risk. Needless to say, this is extremely risky and you are by no means guaranteed good results, but the possibility is there.</li><li><strong>Lower Taxes</strong> - Mutual funds are required to distribute gains to investors at the end of every year, leading to a potentially-large tax bill whether they want it or not. Worse, you owe taxes on these gains even if the fund lost money overall. For example, I owed taxes on gains at the end of 2008 on one fund even though it had lost 30% for the year! With individual stocks, you can completely control when and where you pay taxes.</li> </ul> <p><strong>Disadvantages Of Buying Individual Stocks</strong></p> <ul><li><strong>More Risk</strong> - Since you aren't as diversified, your chances of significant loss are much higher with individual stocks than with a well-diversified mutual fund. Buyer beware.</li><li><strong>More Expensive</strong> - While not always the case, it's possible that purchasing shares on your own will turn out to be more expensive than simply paying a mutual fund manager to do it. You should be confident of your ability to achieve above-average returns to justify this added expense.</li> </ul> <p><strong>How Do You Buy A Stock?</strong></p> <p>To buy individual stocks, you'll need an account at what's called a discount brokerage company. There are many to choose from and I won't try to pass judgment on which is best. For what it's worth, I use TradeKing as my brokerage of choice and I have no complaints. It is easy to use, very inexpensive, and fast. Once you've opened an account, you'll have to deposit money, either by mailing in a check or transferring funds directly from your checking account. Once the transfer is complete, you'll be able to buy any stock traded on a U.S stock exchange and, depending on your broker, quite a few foreign stocks as well. It really is that simple.</p>

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