What should I know before purchasing Stock?

Question

I want to buy my son stock for Christmas. Is there anything I should look out for? Any suggestions on what stock to buy? I dont have alot of money to spend but I have 2K and thought it was a good idea.

Answer 1

You should know that potentially you can lose 100% of your investment.  Other than that, pick a company you really like, or mutual fund that has holdings in a bunch of companies you really like.

Answer 2

I think you should know which way the economy is likely to go in the future.  Before you invest in the stock market.  

Because if the economy is not going to be doing well.  And company profits are not going to be great.  Then you will likely loose money on your stock market investment.

An investment in the stock market is a bet that the economy will be doing better in the future than it is doing now.

Answer 3

I can think of three things you might want to try. None of these are specific to any one stock or mutual fund.

1) DRIPs -- DRIP stands for Dividend ReInvestment Plan. Basically, you buy shares of the company you want to invest in directly from the company (usually through what is called a Direct Purchase Program). Then, as the stock pays dividends, the dividends are used to buy additional shares of the company's stock. This usually works best with larger, well-known companies like Coca Cola, Johnson & Johnson, GE, etc.  Search the web for DRIP investing to find out more. Lots of sites are around that will facilitate the process for you (for a fee of course). The real advantage to a DRIP is that you're usually choosing from established companies that will be around when your son comes of age.

2) If you are investing for your son's education, consider a 529 plan. Most every state has one, and you can choose to invest in any state's plan, not just the one you live in. The choices of what you can invest in vary from state to state. Check out a site like www.savingforcollege.com to compare the different plans to see what you like. Remember: savings in a 529 plan can only be used for education purposes.

3) I believe someone suggested an index fund, which is also an excellent idea. The dirty secret about mutual funds is that most of them, say 75-80% of them don't beat the market in any given year. An index fund invests in the same stocks used to make up an index. So, an S&P 500 index fund would buy shares in all of the 500 companies that make up the S&P index of the 500 largest US companies. One of the big advantages of index funds is that they have very low fees. More of your money goes into stocks and less into the fund manager's pockets. A good source for index funds is Vanguard, which more or less invented the concept. Try www.vanguard.com to see what they have to offer.

Hope this helps.

Answer 4

It is a really good idea to start investing and invest for a longer duration. With a small amount like 2k its much better to buy an ETF, which is like a  bundle of stocks instead of just one stock. So that way it is a little less risky.  

Answer 5

First you need to answer this:

Do you have time to track a stock. The stock that is great today may not be so tommorow because of external factors or stronger competitions or etc.

If you do not have much time to track the market then you would be well off buying a good diversified Mutual Fund.  

Answer 6

read some good books.  Go to www.chrisperruna.com for a list of good books.  my favorite is "how to make money in stock markets"  the way to do it is to buy and sell at the gap filled to maximize your profits.  if you dont know much about stocks, i suggest just giving your son the money.  the stock market is very volatile right now and everything seems to be going down.  

Answer 7

I agree with the above poster.  You better bet is to buy into a mutual fund.  The simplest option is to put it into a low cost index fund.