Opening a brokerage account is the first step towards building your investment portfolio. A brokerage account is an investment tool that enables you to buy and sell various investments such as ETFs, mutual funds, bonds, and stocks.
Let's look at what you can do with your new brokerage account and the types of investment options available for you.
What can I do with a brokerage account?
A brokerage account gives you access to the world of buying and selling stocks for profit. However, a brokerage account can also help you start saving for future goals or retirement. Unlike retirement investment accounts, such as the
401(k) plans
and
Roth IRAs, this type of account offers a lot of flexibility. Ideally, you can withdraw your savings at any time and use the funds for your shorter-term goals.
Importantly, with a brokerage account, you can trade more than a dozen investment products:
● Common stocks and preferred stocks
● Bonds such as the U.S Treasury securities, saving bonds, agency bonds, tax-free municipal bonds, and corporate bonds
● Mutual funds, including the index funds
● Exchange-traded funds(ETFs)
● Real estate investment trusts(REITs) like hotel REITs
● Cryptocurrencies like Bitcoin
● Money markets and certificates of deposits(CDs)
● Master limited partnerships (MLPs)
How do I pick stocks/How do I pick good stocks?
As a beginner, it may not be advisable to start trading all the investment products listed above at a go. A great way to begin is investing in stocks. Now before picking any stocks, you must do your homework. Your immediate goal is to find good value for your money.
Review where you currently spend your money; however, don't just invest with blind faith. Do extensive research and review particular company fundamentals to determine viability. You can use a reliable picking service like
Brown Picks
to know the type and exact stocks to invest in.
Here are a few things to guide your choice of stocks:
Trends in earnings and growths
Check whether the company's earnings have generally increased over time. Trends in company earnings can be a good indicator of its overall performance. If you notice even small regular improvements over a period, it can be a positive indicator of the company's overall health. However, you also want to look at earnings growth in comparison to value, in determining a worthwhile investment.
Industry strength
You can also look at the industry represented in the market to establish future growth potential. With the general industry performance in mind, look at where the specific company you want to invest with fits in. Start by comparing its performance with competitors of the same size and market capitalization during the same period. Comparing the company's performance with that of its peers can provide insights into the stock's overall value and whether it is worth your investment.
Debt-to-equity ratio
Most companies are servicing some debt. Ideally, you can use the debt to equity ratio as an indicator of the company's financial health. A low debt to equity ratio depicts the company using a lower amount of debt vs shareholder equity for financing, while a high debt to equity ratio depicts the opposite. More debt typically signifies more risk; however, it does not always mean the company is being run poorly, as it can vary amongst industries. The best way to find this number is by dividing the total company liabilities by the total amount of shareholder equity. A generally accepted optimal ratio is 2.0; however, it varies by industry.
Check price-earnings ratio
The price per earnings ratio helps determine how well a stock's price is doing relative to its earnings. The P/E provides crucial insight into a stock's market value as it indicates whether a stock is undervalued or overvalued. You can find the company's P/E ratio by dividing its share price by its earnings per share.
How many shares of a stock should I buy?
There are several factors to consider when deciding the number of shares in a given stock to buy. The most significant deciding factor is the amount of capital you have. Where feasible, you should aim at buying a minimum of 100 shares of stock in a given company.
How many companies should I have in my portfolio?
The number of companies in your portfolio will depend on many things, including the amount of money you have available to invest/portfolio size and your specific diversification needs. As a general rule, you should hold 10 to 20 stocks in your portfolio. The idea is to diversify your investments as much as possible; however, your level of diversification is tied to the money one has available to invest. Therefore, some will have a portfolio of 5 to 10 stocks, while others might have a portfolio of 25 to 30 stocks.
Diversification allows you to reduce your exposure to
unsystematic risks. This is the risk associated with a particular company or industry. Studies reveal a
well-diversified equity
portfolio may effectively minimize the unsystematic substantially while giving you the same expected return level of a specific portfolio.
Key Takeaway
A brokerage account offers several benefits, including access to the stock market and other investment products. You can use your brokerage account to buy and sell securities like stocks, bonds, and mutual funds while saving for the future. If you have any questions or need help getting started,
contact us today.