Do you want to invest in the stock market but don’t know where to start? You are not alone. Buying stocks online is a simple process. However, if this is your first rodeo, doing this research may be a little difficult. But don’t worry. Read on for a step-by-step guide on how to buy stocks.
Mastering the Basics: A 4-Step Guide to Buying Stocks for Beginners
Starting your stock trading journey can be both exciting and overwhelming. With this concise 4-step guide, we’ll help you understand the basics of stock trading, from setting up a brokerage account to making informed stock buying decisions.
Step 1: Set Up a Brokerage Account
To buy stocks, you need to apply for a brokerage account. With an online brokerage account, you can electronically transfer funds from an associated bank account to your account to fund any future investment orders. When you buy stocks, they stay in your account until you trade them.
Types of Brokerage Accounts
The basic types of brokerage accounts are:
Discount Broker
- Common amongst online brokers
- Similar to a do-it-yourself option with limited support
- Minimal fees and commissions
- Some don’t have a minimum deposit requirement
Full-Service Broker
- Designed to help investors from start to finish with planning and execution of trading goals
- Offers extensive support from financial advisers at brokerage firm
- Commission or fee-based structure
When analyzing brokerage firms, you want to consider the following:
- Minimum deposit requirement: If you’re just starting out, you may only want to invest a small amount of money to give it a try. Once you get used to buying and selling stocks online, you’ll fill up your stock portfolio. But until you get to that point, it’s best to go with a discount brokerage that charges the lowest fees and has little to no deposit requirements.
- Short term goals: Do you plan to get into the swing of things right away? Do you need all the support you can get to maximize your investment in the shortest possible time? If so, a full-service brokerage may be a better choice.
Some of the most popular online brokers include Ameritrade, Charles Schwab, E*Trade, Fidelity, Merrill Edge, Robinhood, and Vanguard.
Direct Stock Purchase Plan
Some publicly traded companies also offer a Direct Stock Purchase Program (DSPP) that allows you to purchase stock from them. This is another way to purchase stock that requires the use of an online broker. Instead, the company’s transfer agent manages the transaction.
Step 2: Evaluate Your Options
There are tons of individual stocks to choose from. So how do you narrow down your choices to the ones that best fit your financial situation? You can sift through mountains of financial data filled with terms you’ve never seen before in your life.
An even better idea:Think about industries or businesses in which you have a strong interest. Are there some that you’d like to own? If so, start there. Otherwise, you can always ask your financial advisor for some data on promising companies or keep an eye on market trends in the media.
Get a Copy of the Annual Report
Once you have a list of top prospects, go to the company’s website and download an annual report. This is an extensive document that outlines the company’s performance over the last year, as well as a detailed financial report.
The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies to provide this report to shareholders annually.
However, it is also usually available to the public on the company’s website. If you’re not familiar with any of the terms listed, the broker’s website should have information and resources that can help.
Monitor the Company’s Performance
You may also want to consider watching the company’s performance before making a buying decision. Signs of sharp fluctuations or declining revenues may indicate that it may not be the right time to invest.
(Most brokers will also provide tools and resources to help you stay up-to-date on the company you’re considering).
Step 3: Get a Quote
You need to pay close attention to the information provided in the quotes. Stock quotes are represented by ticker symbols, which are abbreviations for companies including:
- Bid: highest price per share a buyer wants to pay per share
- Offer or Ask Price: lowest price per share a seller will accept per share
- Historical information on trading volume
- Interactive resources to help gauge projected performance
Step 4: Place an Order
Now that you’ve done all the technical/management work, it’s time to buy stock. But before you get too excited, it’s important to familiarize yourself with order types.
Market Order
A market order ensures that you get the quantity of stock requested, even if the asking price is slightly higher than your buy price. This is usually the case when you are primarily concerned with the number of shares rather than the price of the shares.
This type of order is best suited for investors who are in it for the long haul. Why is that? Well, a little bit of spread, or the difference between the asking price and the bid price, shouldn’t make much of a difference over time.
Let’s say you want to buy 75 shares of stock for $150 with the following offer:
- Bid: $149 (75)
- Ask: $150 (60)
- Final: $151 (100)
If the seller agrees to issue another 75 shares at $153, your market order will be 60 shares at $150 and 15 shares at $153.
Limit Order
Limit orders ensure that the broker buys shares at the desired price point. Therefore, you may not receive the number of shares you want until the price drops.
Let’s say you want to buy 80 shares at $160 and the seller is only offering 45 shares at that price point. If you decide to execute a limit order, you will receive 45 shares of stock and wait for the seller to offer at least 35 shares or more to reach 80 shares at $160.
No Guarantee
When you place a limit order, please understand that there is no guarantee that your order will be executed as market orders are executed first.
If it takes several rounds of trading to reach the desired number of shares, then expect a large brokerage fee as commissions are attached after each trade.
In this case, it may be in your best interest to execute the market order and pay a little more per share, as the cost of the commission may offset the cost savings per share of stock.
Aon Group Limit Orders
You should also be aware of all-or-nothing (AON) limit orders, which indicate to the seller that you will only buy if the price is equal to or lower than your bid. In addition, the requested number of shares must be provided during that particular bid period.
If you wish to keep the order for a longer period of time, you can code it as Good Till Canceled (GTC). The time frame can vary from a few months to several months.
Stop Orders
Stop orders are price-driven and will only be executed when the requested quantity of shares reaches the stop price. There are two types of Stop Orders you should be aware of:
- Stop-Limit Order: Functions like a Limit Order in that it is only executed at the “Stop Price”. However, you may not get the number of shares you want.
- Stop-Loss Order: Functions like a market order, but the main difference is that the entire order will only be filled if the price is at or below the “stop level”.
How many shares will you be purchasing?
Before you can execute a market or limit order, you need to decide how many shares you want to buy. There is no right or wrong amount, and some beginners prefer to start small and expand once they are more familiar with how stock trading works.
The Next Steps
Congratulations on your first stock purchase. This is the first step in building wealth and securing your financial future.
Even if your first round doesn’t go as planned or you experience a sharp downturn in the market, don’t admit defeat right away. Remember why you started and focus on the light at the end of the tunnel or your future earning potential.
If you’re not sure which stocks to pick, you might consider buying a mutual fund or etf.
FAQs
How do I buy and sell stocks?
You can buy and sell stocks through a stockbroker or an online trading platform. A stockbroker can help you buy and sell stocks and advise you on the best investments for your portfolio. If you decide to use an online trading platform, you need to research and choose the one that best meets your needs.
What is the best way to buy stocks?
The best way to buy stocks is to do your research and learn about the different stocks and companies that interest you. Then, choose a fund that best suits your investment goals and risk tolerance.
You should also consider the fees associated with the transaction as well as the terms of the broker you plan to use for your purchase. It’s also important to practice patience and self-discipline to avoid making hasty decisions.
How do I choose which stocks to buy?
When choosing which stocks to buy, you will want to consider a variety of factors. You should look at the company’s financial position, its competitive advantage in the market, its management team, the industry in which it operates, and its earnings potential.
In addition, you should consider your financial goals, risk tolerance, and investment timeline. It is important to do your own research before you start buying stocks. You may even want to consult a financial advisor to make sure the stocks you’re considering are a good fit for your personal financial situation.
What is the risk associated with investing in stocks?
Investing in stocks carries a degree of risk because the stock market can be volatile and stock price movements are unpredictable. It is important to understand that stocks have the potential to increase in value as well as decrease in value.
What are the costs associated with buying and selling stocks?
Costs associated with buying and selling stocks include commissions, taxes and any other applicable fees. Depending on the broker, commissions can range from a fixed fee to a percentage of the total transaction value.
Taxes such as capital gains tax may also apply when selling shares. Other fees such as account maintenance fees, custodian fees and margin interest may also apply.
How old do you have to be to trade stocks?
In the United States, you must be at least 18 years old to open a brokerage account and trade stocks. However, some brokers, and in some states, you need to be at least 21 to trade stocks.
How much money do I need to start investing in stocks?
The amount of money you need to start investing in stocks depends on the type of stock you plan to buy and the amount you are willing to invest. Generally, you should start with at least $1,000. However, some online platforms require at least $500 or less.
How much money can I make from investing in stocks?
How much money you can make investing in stocks depends on the type of stock you invest in, the amount you invest, and how successful you are at investing. It’s important to remember that stock investing can bring losses and gains as well.
