How to buy a stock, and should you?

Ask NJMoneyHelp

Photo: wax/morguefile.com

Q. My wife wants to invest $15,000 in a stock like AT&T. Can she do this on her own or does she need a broker or investment strategist? How does she do it?
— Investor

A. It’s a great question. Before we turn to the details on how to buy individual stocks, you and your wife should ask yourself some questions.

Among them are how much of your overall portfolio the $15,000 represents, whether you’ll need the money in the next five to 10 years, and how the investment might affect your overall financial goals. Then ask yourselves how comfortable you are with the volatility and investment risk that comes with owning individual stocks.

Assuming that you’re comfortable with investing the $15,000 in stocks, the question becomes whether to invest it all in one stock like AT&T or in a portfolio of stocks such as a mutual fund or exchange-traded fund (ETF), said Gene McGovern of McGovern Financial Advisors in Westfield.

“While AT&T is an S&P 500 company with a long history of paying dividends, an investment in any one stock is considerably riskier and more volatile than investing in a diversified portfolio of stocks, such as a mutual fund or ETF, which can hold hundreds or even thousands of stocks,” McGovern said.

He said if you prefer to hold individual stocks, then as a stockholder, you’re investing in the future growth, earnings, and dividend-paying capacity of the company. Before making such an investment, it’s a good idea to research the company by reading its quarterly and annual reports, as well as independent analyses of the company’s current performance and future prospects, McGovern said.

As for how to buy individual stocks, your wife has two main options. She can set up an account at a brokerage firm, whether online or with an individual broker, or buy stock directly from the company.

“To buy stock using a brokerage firm, you simply open an account on the firm’s web site or via telephone and transfer money into it, similar to opening a bank account,” he said. “Each web site will have detailed instructions on how to buy or sell individual stocks.”

A broker can also do this for you, he said.

You should also pay attention to costs, and search online for studies that compare the costs from one brokerage firm to another.

Once you’ve decided which stock or stocks to buy, you can enter an order to buy it at the current market price, called a market order, McGovern said. Alternatively, you can enter what’s known as a limit order, which is the price at which you wish to buy the stock.

“For example, if the stock is currently trading at $50, but you wish to pay only $45, the brokerage firm won’t execute your order to buy the stock until its price falls to $45,” he said.

The alternative to using a broker is to buy stock directly from the company through what’s known as a Direct Stock Plan, McGovern said.

You can learn more about this on the Securities and Exchange Commission website.

“Once you own a stock, you can also buy more shares of it through a Dividend Reinvestment Plan,” McGovern said. “Under those plans, your stock dividends are reinvested in more shares of the company rather than being paid to you in cash.”

But here’s an important point: Given your question, it appears that you and your wife are relatively new to investing. If that’s the case, you may want to consult with a financial planner on your overall situation before committing the money to any particular investment.

Email your questions to moc.p1511336503leHye1511336503noMJN1511336503@ksA1511336503.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.