How to Buy Stocks in 4 Steps for Beginners
Narrator: Hello, and welcome new investors. My name is Cameron May and if you’ve never placed a trade before, you’re in exactly the right place. We’re going to get you ready and confident to place your first stock trade. To do that, we’re going to talk about what a stock is. Then we’re going to talk through the series of steps or decisions traders make when selecting an individual stock, and use one approach to selecting a stock as an example. Along the way we’re going to show you how to research and place a trade on schwab.com.
So, let’s get started. First, what is a stock? When you buy a share of stock, you’re purchasing partial ownership of a publicly traded company. For example, if you buy a share of McDonald’s, you’re becoming a partial owner of that company. These shares are bought and sold in a marketplace called an exchange, and prices are set according to the changes in supply and demand for those shares. Second, why invest in stocks? On a really basic level, you stand a chance to profit if you’re able to purchase the shares at one price and then, if they appreciate, sell them at a higher price. This might allow investors to grow their money faster than just saving and potentially stay ahead of the decaying impacts of inflation.
You should also be aware that there are lots of ways to pursue stock investing. For this video we’ll focus on ways to identify individual stocks with potential for high growth over the next few months to a year. Now, picking individual stocks isn’t for everybody, but for those with the time and knowledge to do the research, it can be a way to pursue portfolio growth, and some may even find it fun.
Someone who may not have time to really research companies and keep up with the markets may be better off with a more passive investing style, like index funds.
There are four essential decisions when it comes to buying a stock. First of all, you have to decide what to buy. Then you need to determine when to buy. You need to determine how much to buy, and you have to have a plan for when to sell. Let’s start by discussing that first decision—how you can decide what to buy.
When it comes to deciding what to buy, it’s pretty research-heavy, but it’s also where you should spend most of your time in this process. Now, due diligence can’t completely protect you from an unexpected market turn since gains are not guaranteed. But it can make sure you know exactly what you’re investing in. After all, Warren Buffett says to never invest in something you don’t fully understand.
Investors can use a process called fundamental analysis to better understand a company. You look through a company’s financial statements—like balance sheets—to determine if it’s a good investment.
Think of it like looking under the hood of a car. Like looking at the engine or the battery of a car, you can look at financial metrics and ratios to make sense of a company’s business performance. These can help you answer basic questions, like is this company growing, and help you compare companies of different sizes. For now, we’re only going to look at a few numbers, so keep in mind, this is not a complete list. It’s just a sampler of some ratios you can look at to get you started.
First up, we’ll look at EPS growth rate. EPS stands for earnings per share, which tells you how much a company is earning per every share of stock.
For example, if a company reported $1 million in earnings and had 100,000 shares of stock, its EPS would be $10.
Growth in EPS over time can show a company’s profitability is growing.
Let’s say a company has an EPS of $10 per share in 2018, and in 2019 they had an EPS of $12. The annual growth rate for that company would be 20%. This suggests the company is growing, especially if EPS has grown over multiple years.
Next, we’ll look at return on equity. ROE may help a prospective investor address a simple but potentially important question. If I’m considering investing in this stock now, how has this company performed for previous investors?
The return on equity is net income of a company divided by the shareholder equity. Shareholder equity is a company’s assets minus its debt, so the ROE could be considered the company’s return on its net assets.
Basically, it measures how effective a company is at turning its assets into profits.
Let’s say a company had a net income of $10 million last year. Let’s say it had $50 million in assets and $20 million in debt. You take the $10 million and divide it by assets minus debt, or $30 million. That would mean this company has an ROE of 33%. The higher the ROE, the more effectively the company is able to make profits from its assets, which could mean more growth in the future.
Next, let’s think about profit margin. Profit margin may indicate to a prospective investor just how good of a job a company is doing at turning sales into profits. Can it keep its costs low and provide room for strong earnings? The profit margin measures how much of a company’s revenue it keeps as profits.
It’s typically shown as a percentage. So, if a company profited $100,000 off of $1 million in revenue, it would have had a profit margin of 10%. Higher profits often mean more potential for future growth.
So now that we understand these metrics, how does an investor find companies with features like strong EPS growth, ROE, and profit margins?
Now I’m going to show you how to find stocks that fit characteristics you choose. To do that I’m going to use a tool on schwab.com called a Stock Screener.
Here on schwab.com we find ourselves on the home page on the Account Summary page. We’re going to navigate up to Research. Then, under Research Tools I’ll select Stocks. Now I’m on the Stocks tab within the Research Tools tab, and under Find Stocks I’m going to click Stock Screener. Now, under My Recently Saved Screens, I’m going to select Create My Own where we can create a screen from scratch. In this case, we’re going to look for the stocks that are exhibiting those three characteristics that we’re interested in. So, here we are on the Create a Screen page and we’re going to turn our attention to this left column. This has categories where you can enter specific metrics to narrow down a list of stocks that meet your criteria.
The criteria you use in your searches will depend on your strategy; we’re just looking at an example and this is not a recommendation of any specific stocks or strategies.
Remember that for this example we are looking for stocks that are fundamentally strong and have a good track record of growth over a few years. But before we get to those criteria there are some basic ones to address first. We’re going to start by searching based on market capitalization.
This basically measures how big a publicly traded company is. You calculate it by taking the current price per share and multiply that by the number of shares that are trading in the public. So, if we had a stock that’s trading $100 per share and there are 1 million shares trading, we’d say that that’s a market capitalization of $100 million. That might sound like a lot, but that would still fall in the small capitalization category. And that’s what we’re going to select for our example today.
To do that I’ll open the Basic section and then check Market Capitalization. Then we’ll select Small Cap.
To explain why we’re choosing Small Cap for this example, let’s pause and think about what a growth investor is looking for. They’re hoping for price to appreciate, to go up. Obviously large-cap companies can also grow in size and in price, but a small cap stock conceptually may have more room to the upside.
So that’s one criterion that we’ve selected. As you can see that narrows our search down to 953 companies.
Now I’m going to add another criterion, and that is Average Volume. Volume shows us the number of times a security is being traded. When volume is high, we know there’s the potential for more buyers and sellers meaning we have a higher chance of entering and exiting trades at the price we want.
So, under Basic let’s select Average Volume (10 Day) in that left column. When those criteria come up in our screener, under Average Volume for this example I’ll choose everything greater than 250,000.
When dealing with small capitalization companies, some growth investors might also want to avoid very low-price stocks, which can be more risky and volatile.
So, I’ll select Price, and then we’re going to select everything above $20.
So, now let’s add the three fundamental criteria we discussed and see if we can narrow that down even further. Let’s begin with EPS growth.
That’s under Company Performance. We’re going to focus on EPS Growth History for now. We’re going to check the box for TTM versus TTM 1 Yr Ago. TTM stands for trailing twelve months. Basically, this is measuring EPS over the past 12 months and then it’s comparing that to the 12 months preceding that. So, if you’re looking at this on July 1 of 2023, the TTM would taking EPS from July 1 of 2023 back to July 1 of 2022 and then compare it to EPS from July 1 of 2022 back to July 1 of 2021.
Remember that we’re looking for above-average growth, but that can vary based on how the overall economy and the market is doing. So for this example we’ll select Enter a specific value, and enter Greater than or equal to 10%, narrowing the results down to 259 companies so far.
Next, let’s go to return on equity, or ROE. That’s under the Financial Strength section. I’ll select the Return on Equity (TTM). Remember TTM stands for trailing twelve months, so this is measuring ROE over the past year. Again, we’ll choose something above average for current market conditions, greater than 10%, leaving us with 163 companies.
So now, finally, we’re going to go to Net Profit Margin, which is also under Financial Strength. MRFY stands for most recent fiscal year. Here’s our third fundamental metric. We’re going to go with greater than 10%. Clearly, from the time this is being recorded to the time you are watching it, these results could change. This is just a snapshot in time, so, remember you should adapt your own screen as you see fit.
With those six metrics we’ve now pared down the list of potential candidates to 99 companies. So, I’m going to click on View 99 Matches.
So, we’ve discussed how to decide what to buy. We’ve gone to the site and found some stocks that meet some sample criteria. Now we can filter our results even more with decision number two, which is when to buy. Now, for some long-term investors, they might find a stock on their screen and just go ahead and buy it and hold it for a longer period. But in the short term, timing can play a big role. This is where a practice known as technical analysis can be useful.
Technical analysis involves analyzing charts, looking at historical trends and patterns in price to try to predict future prices. Technicians believe trends repeat themselves and are predictable because human behavior is somewhat predictable. Technical analysis can potentially help us identify good times to buy or sell a stock.
Now, a growth investor is very likely looking for a stock that’s already moving upward, and they just want to latch onto that momentum. So, we have to be able to identify a stock’s current trend by looking at its chart.
There are three main types of trends: They can move up, they can move down, and they can move sideways. And a growth investor is probably only interested in one of those: an uptrend. So, let’s go back to the site and have a look at some charts of stocks we’ve screened for.
The results are listed alphabetically. I’ve already pulled up a few from the top of the list here so we can see examples of different trends. We’ve got Axcelis Technologies, symbol ACLS, which appears to be generally trending upwards over the past six months, Alpha Metallurgical Resources, symbol AMR, which has more or less been sideways, and American States Water, symbol AWR, which is has been trending down over the past six months. I want to explore these charts in a little bit greater detail. Let’s go back and start with our uptrending chart.
On the stock’s profile page, I’ll scroll down to the Chart section and expand it. Trend analysis can be theoretically done on any time frame. For this example we’ll use six months, so I’m going to be using a six-month filled candlestick chart. You can change the duration here in the upper left and the chart type here. We’ll explain more about how to read candlestick charts later, but for now this can still help us see the trend. As you can see, stocks tend to not move straight up as they’re moving in an upward trend or straight sideways as they’re going in a sideways trend or even straight down. Instead, there tends to be a stair-stepping process, an ebbing and flowing in the direction of the established trend. And so, what we look for are short cycles in price, a run up and a pullback, a run up and a pullback. And to illustrate this, I want to draw some trend lines for you. We can do that by using the trend line tool here in the left column.
And we’ll notice here on ACLS that, going back to May, we hit a low right here and then rallied up to a cyclical peak. Then we sagged back to a cyclical low, accomplished a second rally, and down to a third cyclical low. You can see each cyclical peak exceeds the high of the peak before. This is known as a higher high. And each cyclical low exceeds the low from the previous cycle. So we see a combination of higher highs and higher lows, and that’s what’s known as an uptrend.
But as we’ve discussed, trends can behave in other ways.
Let’s look at the sideways trend on AMR.
In this case, we have a stock that’s not accomplishing clearly higher highs and higher lows. I’ll draw some lines again. As I draw them you can see that as it attempts a cyclical rally, those highs are taking us up to relatively equivalent areas. So we have similar highs, and at the same time, we see that we have similar lows. On this chart, the lows appear to be in the area of $136. The highs appear to be in the area of $170. So for a growth investor, they may see a stock like this, and they may park that for consideration of another time. Technically, it doesn’t seem to fit the bill of being an uptrending stock.
There’s a final way a stock could be trending and that’s down. We’ll look at AWR for this example.
Drawing some trend lines again here, you can see that over the past several months the stock has been making a series of lower highs. And I’ll add a second line to help highlight that there’s also a series of lower lows. So, this seems like a pretty clear downtrend recently. So even though this stock meets some strong fundamental criteria from our screen, if I’m a growth investor looking for a stock that I want to go up in the coming months, based on the technical analysis this may not be an ideal time to enter.
So, of those three stocks, let’s go back to ACLS, which seems to be exhibiting an uptrend. I’m going to move on to a second principle of technical analysis, and this is known as support and resistance. Support is a fancy term for a price floor. Resistance is a term for a price ceiling. Even within an established upward trend, looking at support and resistance can show you that there may be better times to get in than others. Here on ACLS, what we’ll notice is that if we were to draw a line connecting those lows, it’s as though there is an invisible ramp that’s supporting price activity from below. The stock runs up, and then it pulls back. It generally touches along that ramp. So this is an example of support. And that can play an important role in the timing of an entry. Because as you look at this chart, where do you think you might be inclined to get into the stock? Would it be at times where the stock has separated itself significantly from that support level, or as the stock has retraced and come down close to support? Now we’re starting to think like a trader. You may have also noticed that there is a second ramp effect in play here, and that is if we were to connect the highs. Let’s draw a line connecting those cyclical highs, and we notice that it appears, in this case, that it’s almost like there’s an invisible force resisting the advance of stock prices above that line. Now, in both cases, support and resistance, there’s nothing mystical about these forces. It’s actually just buyers coming in driving prices back up from support and sellers coming in driving prices back down from resistance. But the ability to identify price floors and price ceilings, price support or price resistance, may help a trader who is looking for a growth opportunity, looking to optimize their entries.
Now that we’ve identified trend and we’ve identified support and resistance, we can start to learn from historical behaviors on this chart and maybe look for entry opportunities. I’ll set my chart to Scroll to Pan/Zoom. Then I’ll scroll to zoom in on the past few months. And we’ll notice that as the stock has been stair stepping higher, there are specific points at which the trader might look for entry. For example, if we look back to say mid-to-late May, the stock pulled back. For some investors, just that mere pullback may represent an opportunity to enter. But there is a concern here. Buying a stock when it has turned down might be trying to catch a falling knife. So, for other traders, they wait for that price momentum to swing up again. And that’s where these little red and green hash marks can come in handy. These are called candles. And very simply, they tell us day by day what price has done. The green ones tell us that price went up from the open. The red ones tell us that price fell from the opening of that day. So, for a short-term investor who’s looking for a growth entry signal, they may look for a pullback down to an apparent area of support that is followed by a green candle, or in other words, we call this a bullish candle. Price is starting to move up again. So that’s one potential entry.
Now we’re starting to bring together the elements of technical analysis—trend identification, support and resistance, and now entry signals. But I want to give you a new tool here. Let’s start to explore some of the technical indicators that are available on this chart. One tool that’s commonly used by technical traders is something known as a moving average, which can be used to identify trend. It can also be used, theoretically, to identify areas of support and resistance.
I’m going to remove these other drawings before I add the indicator to make it easier to read.
To add a moving average to my chart, I’ll click Indicators and search for simple. That will give us a choice between one line, two lines, or three; let’s go with two. For our exercise now we only need the 50-day moving average, so we’ll remove the 20-day.
You’ll notice now we have a single line moving through that price chart.
Let’s talk about what this line is and its potential implications for that growth investor. Like I said, I have selected the 50-day moving average. This will show me what the average price has been for this stock over the last 50 days. This indicator looks back over the last 50 days and generates a plot on the chart to indicate where that average price is.
On our chart today I can see that that line is just below $150, around $148. So that tells me the average price over the last 50 days is about $148. Well, that average changes over time. So this just plots a new dot every single day and then connects that with a line. That’s how the indicator is generated. But how is it used? For a technical trader, it may just be an indication of trend. We’re using 50 days of data here, so it’s more of an indication of an intermediate trend direction. And in this case, you can see that very recently, in the second half of May, the trend changed as defined by this simple moving average. So trend direction is one potential application for a trader. Another very possibly powerful application is that this indicator might be used to generate entry signals. You’ll notice, in early May, price rose up and through that moving average line. For some technicians, that might actually signal an entry. And in this case, you can see that since that date, the stock has continued to make higher highs and higher lows.
So here we’ve discussed two potential entries. A first might be simply price rising up and through that moving average. But in the absence of a recent signal from that crossover behavior, the investor might also look for the stock price pulling down to a support level and then accompanied by a green candle. So, let’s look to see if we have a more recent signal. I’m adding a trend line back on here. We can see the stock has recently pulled back toward support, and has since had some green candles to begin what may be a new upswing. We’ll take this as an entry signal.
We’ve discussed what to buy. We’ve covered when to buy. Now we need to discuss something very vital, and that is how much to buy. When we’ve gone to the trouble to look for stocks exhibiting characteristics that we like, it’s easy to fall in love with those stocks and overcommit to a single security. And that can dial up the risk. An individual looking for growth may make a decision in advance that they will not commit more than a specific amount of their portfolio to any single stock.
For example, let’s say we have a portfolio with $100,000. And maybe we decide that we’re not going to allocate more than 5% to any individual security, no matter how much we like it. That can serve a twofold purpose for us. Number one, it keeps risk minimized in a single security. The second potential benefit is that it provides for diversification of the portfolio. If we’re only putting 5% into one stock, it takes 20 stocks to get a full allocation.
Let’s make this real and go back to the site and place our example trade.
Here we are on a now-familiar stock’s profile page with ACLS. And we have a stock that meets all of our fundamental criteria. It’s recently given a buy signal of green candles following a pullback toward support.
So to place that sample trade, we’re going to go up and click the Trade button. This pulls up what’s called the SnapTicket®. You can see its automatically populated the stock we’re going to buy which is ACLS. Our action is Buy. Since this is just an example we’re going to buy one share to keep things simple.
For today’s example, we’re going to use a Market order, which should give us a quick fill. And now, finally, we’re going to review and place that order. This is obviously where the excitement level rises. So now we’re going to come down and click on Review order. And don’t worry, we haven’t made a solid commitment yet. We still have time to review that this is really what we want to do.
So, let’s review. We’re buying one share of ACLS at the market price, and this is just an order that’s good for the day. This gives us an estimated cost of the trade. Since we’re buying one share, it’s the price of the stock which is $178.60. With some trades, there may be transaction fees involved, but that doesn’t apply here. Alright, we’re now ready to place the order. Let’s go ahead and send this one off to market. If we look at the order status you can see we’re now the owners of one share of ACLS at a price of $178.38. Our order actually filled $0.22 below our estimated cost.
We’ve demonstrated how traders can decide what to buy, when to buy, how much to buy. We’ve actually even placed that first trade. Now it’s time to talk about when to sell. There are a few ways that we might accomplish that. Let’s get right back to our trade.
I have to acknowledge that we’ve done a lot of work up to this point. And clearly what the growth investor is hoping for is this stock will go up in price, and they’ll be managing profits over time.
But we have to be realistic. Despite our best efforts, it’s quite possible the stock might have a different idea, and it could go down. So, let’s talk about managing that downside risk first. And as I mentioned, for some investors, they may just decide, from my entry point, maybe I have an exit in mind to sell if this stock happens to fall, let’s say, 10%. And I’m not taking 10% entirely at random. There’s actually a mathematical process to losses and the difficulty in recovering from those losses. For example, let’s suppose that you bought a stock for $100 and then it happened to slide just 35%, down to about $65. Well, with that remaining $65, you have to accomplish more than a 50% profit just to get back to breakeven. So those losses—the compounding difficulty of recovering from losses grows and particularly once you get about past that 10% threshold.
Now, you can just keep an eye on the stock and enter an order if the price falls, or you can enter what’s called a stop order. A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price, the quote stop price. If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order isn’t executed. So, for our example trade today, let’s put it in a stop order that will trigger 10% below our entry price. If you recall, we were able to purchase those shares for $178.37. 10% below that is about $160.48.
Let’s show you how to enter a stop order on schwab.com. Let’s go to the All-In-One Trade Ticket. First of all, we’re going to enter the symbol ACLS, the company we just bought a share of. Under Action we’ll choose Sell, which will auto populate the Quantity to 1. Now let’s choose our order type. In this case, we’re going to be using a Stop order. And here we can enter a price that will trigger a sell order. So, 10% below our entry of $178.37 was down at $160.48. We’re telling the system, if the price falls to $160.48, send a market order to sell and close the position at the best possible price. There’s certainly the possibility that it could actually fill at a lower price. What happens when $160.48 is reached, if it ever is, it triggers a market sell order to go to the market, which means, hey, we’re just filled at whatever the next price is. And that could be a little bit higher than $160.48. It might be lower than $160.48. Now, our time-in-force, let’s change that to Good till canceled. If we don’t make that adjustment, this order would only be good for a single trading day. So, we choose good till canceled. We can set a precise expiration date or just leave it at the default. Now, I’m going to come down and click on Review order. And once again, we have that opportunity to make sure this is really what we want to do. We’re selling one share of ACLS, but only if the price happens to drop to $160.48. That is the activation price or the stop level. The credit that I might receive for the sale of those shares at that point is $160.48. And we’re ready to place that order. And now that order has been submitted, and we’ll just have to see if it ultimately fills. That is to address the management of the trade if the stock doesn’t perform as expected. However, we’ve done some work. Hopefully what we’re looking for here is for price to rise at this point.
So, how does a trader manage profits in the case of a stock that’s performing well? Well, we want to give that stock some room to move, but we also want to stay ahead of any significant new developments that might change our minds about continuing ownership of this stock. For example, let’s say we get six months down the road, and we’ve identified a significant area of support, and then that support is broken. That may be interpreted by a technician as a signal of pending bearishness for that stock, and it may be a reason to exit the trade. So, there could be a technical reason. There might also be a fundamental reason.
Let’s say that six months down the line, the stock is still performing, and yet there is a significant change to the management team. Maybe the CEO is replaced, or maybe a new competitor enters the market. So, we just want to keep our eye on news and new technical developments in the management of this trade going forward. But in any event, it may be a good idea for a trader in the management of that position to establish some routines. Obviously, with ACLS, we’re hoping the stock rises. And let’s suppose that it’s doing its job. It’s climbing to higher and higher levels. But there is our stop, still waiting all the way down at $160.48. Well, what we might do is put it in our calendar to revisit that stop, see if the price has reached significantly higher levels, and then move the stop up to just 10% below those new levels. So, we’re starting to manage that downside risk and, conceptually, managing new profits.
And that’s it. Those are the basics you need to place your first stock trade. There’s a lot more detail you can sift through, so don’t think this is all there is to it. There’s a lot more you can learn—and we’re here to help. Head to schwab.com/learn and check out everything Schwab has to offer to help you learn how to own your tomorrow.
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This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any investment decisions.
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Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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