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Few things are as exciting and as scary as hopping into the stock market for the first time.
There are stories everywhere about people retiring at 28 because they bought a stock at the right time, but there are just as many stories about people who lost their pants.
Stock buying is quick and easy. With a little stock research, you can be on the road to meeting your financial goals.
How to Buy Stocks (Step-by-Step)
#1. Choose a Stock Broker
Online brokerage accounts are a great option for people who are willing to do the leg work to figure out which stocks are best for them.
Online brokerage accounts are super easy to open, requiring only a short application, proof of identification, and a social security number for tax purposes.
There are many brokerage accounts out there, each with different offerings.
What brokerage firm is best for you has a lot to do with what your goals are for your experience.
Maybe you’re looking for a brokerage account with amazing educational resources or unparalleled customer service, or maybe low fees are more important to you.
Robo-advisorsare also online brokerage accounts, but they offer more on the advice front than straight online brokerage accounts.
Robo-advisors are aptly named because they use automation to help investors decide which investments are best for them.
These accounts are best suited for people who know they want to enter the stock market but aren’t entirely confident in their ability to choose stocks for themselves.
It is also important to note that Robo-Advisors almost always recommend Index Funds and Exchange Traded Funds (ETFs), which are not individual stocks.
>> More:Best Robo-Advisors
#2. Deposit Funds
No matter which online brokerage you choose, you have to fund the account before making trades.
Money can either be transferred into your brokerage account from your bank account, or you can mail in a check. Brokerage firms typically do not accept cold, hard cash.
Once your funds are processed and available, you can start making trades immediately.
#3. Research Stocks to Buy
When investors buy a stock, what they are actually buying is a fraction of the company. Their stock ownership entitles them to dividends proportionate to the amount of the company they own.
Companies sell stock to raise funds for their day-to-day operations and expansion. There is no obligation for stockholders to hold their stock longer than what serves their purpose. Stocks are fully liquid during market hours.
Exchange-traded funds or ETFs are securities made up of a basket of other stocks designed to perform similarly to a specific index or sector. When you buy an ETF, you are buying just one stock but getting access to many stocks that will mirror the performance of a particular sector. Examples of sectors are energy, gold, or technology.
ETFs are very liquid as they are traded on an exchange. They are more diversified than owning individual stocks because they are comprised of many stocks.
Mutual funds use economies of scale by collecting money from many investors. Active mutual funds have a fund manager make decisions about which stocks, bonds, and other securities to trade while passive mutual funds track a sector or index.
Mutual funds offer smaller investors access to a professionally managed portfolio that aligns with their risk tolerance and investment objectives.
Mutual funds are not as liquid as stocks as they are not traded on an exchange like ETFs.
The average mutual fund has over 100 securities. Mutual funds are what are most commonly seen in employer-sponsored accounts.
Index funds are ETFs or mutual funds that invest in a basket of securities designed to mirror a certain aspect of the market.
Sector funds are designed to track sectors; Index funds are designed to track indexes. The most well-known index is probably the S&P 500.
S&P 500 Index funds are made up of individual stocks that are expected to perform in concurrence with the S&P 500. Index funds have a tracking error that the fund manager tries to minimize you can compare the tracking error of funds that track the same index to help determine which fund is right for you.
When the S&P wins, the Index fund wins. Index funds are the best way to ride the gradual growth of the market using a buy and hold strategy.
#4. Diversification is Key
You have certainly heard the phrase “don’t put all your eggs in one basket”, and those words were never more true than they are in the stock market.
Diversification is the key to successful investing. Diversification is a risk mitigation tactic that spreads assets across several securities to take advantage of varying reactions to market volatility.
In the simplest terms, diversification is what helps investors maximize upside potential and minimize risk.
#5. Know the Different Stock Order Terms
- Ask: The ask is a price quote for a single share of stock. Ask prices are what price a seller is willing to accept for the stock. At any point in a trading day, stocks are seconds from adjusting prices. Ask prices basically lock in the price the seller is willing to accept regardless of what the stock price is doing from second to second.
- Bid: Whereas the ask price is what a seller is willing to part with their stock for, the bid price is what someone looking to buy is willing to pay. Again, stock prices are extraordinarily reactive during a trading day, and bid prices indicate the highest price a buyer is willing to pay no matter what is happening in the market at any given moment.
- Bid-Ask Spread: Whenever a market order (buy or sell) is placed, the order goes in the queue of pending transactions. When the transaction is processed, sellers will receive the lowest selling price (ask price) available at that time, and buyers will pay the highest cost (bid price) available at that moment. The difference between these two prices is called the Bid-Ask Spread. The Bid-Ask spread ranges from a few cents to potentially a significant amount depending on the volume of the sock. The bid-ask spread is what the person handling the transaction keeps as profit.
- Limit Order: A limit order is what triggers a buy or sell of a stock because it reached a price you are willing to pay. Limit orders are used by investors who want to take advantage of market dips to grab up shares of an investment or take advantage of market growth. The orders execute automatically if the share reaches the designated limit price. For example: Say you want to buy a stock currently valued at $10 if it ever reaches $8. You would put a limit order in that would automatically execute the sale if the stock lowers to $8.
- Market Order: Market orders are orders designed to be executed as quickly as possible without serious regard to current market value. Market orders are transactions more concerned with getting in the market at a time than at a price.
- Stop-Loss Order: Stop loss orders work similarly to limit orders, except the goal isn’t to make the most money possible on an investment, it’s to keep investors from losing money. Stop-loss orders execute immediately after the stock reaches the “low’ price designated by the investor. If we use the same example as Limit Order, an investor holding a $10 stock might not want to let the stock go any lower than $8. The investor can put a stop-loss order in to automatically sell if it falls to $8.
- Stop-Limit Order: A stop-limit order looks and acts a lot like a stop-loss order but with one major key difference. When the stop-loss order price is triggered, the sale of the stock is executed at market price. Stop-limit orders also have a price that triggers a sale, but the sale does not take place until a limit is reached. The idea behind a stop-limit is that an investor believes the stock will rebound, and they are willing to wait for it to rebound before they sell. It allows investors to maintain control over the portfolio despite a market decline.
>> More: Best Stocks to Buy
How to Make Money on Stocks
The best way for a beginner to make money in stocks is to adopt a solid buy-and-hold strategy. It’s not as sexy as fast-paced buying and selling, but the steady growth of the stock market should be your concentration.
There are a few ways to maximize earnings using this strategy. First, find stocks that pay dividends- the underlying company pays out a portion of its profits to reward investors for holding their stock.
Second, and probably most importantly, you need to be familiar with your risk tolerance and find stocks that align with your risk tolerance goals.
Being on a rollercoaster that you didn’t ask for is a great way to taint your market experience.
Staying aligned with your goals helps you have a more tolerable market experience.
>> More: Best Stock Trading Platforms
How to Buy Stocks FAQs
Here are the steps to buy a stock:
- Research and Open a Brokerage Account
- Fund your Brokerage Account
- Decide Which Securities You Want to Hold
- Decide How Much to Invest
- Place Your Orders
What Are the Best Stocks for Beginners to Buy?
Beginning investors should start with stocks that have been around for a while and with a history of steady growth. These are referred to as blue-chip stocks.
Examples of these stocks include Amazon (AMZN), Disney (DIS), Apple (AAPL), Microsoft (MFST), Facebook (FB), and Alphabet/Google (GOOGL).
Some of these are valued quite high, but “buying the dip” or buying these when the prices are lower than usual, and holding could provide excellent growth over time. That being said it is extremely difficult to time the market and buying stocks of good companies is generally beneficial in the long term.
Is It Hard to Buy Stocks?
In short, no. To invest in the stock market, you must have a brokerage account. There are a variety of options in brokerage accounts that range from full-service to a simple pass-through.
The brokerage firm you choose has a lot to do with how much support you want in the stock-buying process.
Opening these accounts is as simple as opening a checking account at your local bank. Once your brokerage account is open, you just need to deposit funds, and you are all set.
How Do Beginners Buy Stocks?
Open a brokerage account, fund it, and get to buying. It is not difficult to open a brokerage account or buy stocks.
If you want to be a successful investor, some research is a great idea rather than investing with no real plan.
Can I Buy Stocks with $1,000?
Absolutely. Many online brokerage firms have no account minimum, and you can buy as little as one share of a stock. Some brokerages are starting to let investors purchase fractional shares too.
It is important to remember that just because something is cheap doesn’t mean it’s a bargain. You’ve probably heard “you get what you pay for”, and the stock market is no exception.
When Should I Invest in the Stock Market?
Timing of the market is not as important as time in the market. You should enter the market when you have time to dedicate to researching good options and have money to invest.
Investing is not an all-or-nothing endeavor either. You don’t have to plunk down your entire life savings to be successful as an investor.
Even $50 a month with a very conservative 5% rate of return can grow to as much as $7,750 in 10 years. In 40 years, you would have nearly $75,000 due to compound interest.
Are Stocks and Shares Similar?
Though the two are often interchanged, there is a small syntax error with this. Stocks are what companies sell to raise money for their benefit.
Stocks are then divided into shares which signifies an investor’s actual company ownership.
The word stock is broader and does not imply ownership in any company.
How Many Stocks Should I Buy?
Budget constraints are, obviously, an important piece of this puzzle overall, but new investors should strive to buy 3-5 stocks across several sectors when they begin investing.
The more individual stocks that you have, the less your overall portfolio is impacted by the performance of a single stock.
When Do I Sell My Stocks?
You need the money.Stocks are extraordinarily liquid, and if you have an unforeseen circumstance that your emergency savings will not cover or need funds for a big purchase, you can always sell stocks to get the money. Please note that funds need to be set aside to pay capital gains tax when you sell.
The company is about to undergo a major change. If the company you’re holding shares in is about to be sold or go bankrupt or completely restructure, you might want to sell before the growing pains.
Is Now a Good Time to Buy Stocks?
If you, as an investor, have a strategy to buy and hold stock to take advantage of gradual market growth, it is always a good time to buy stock.
Is Buying Stocks Safe?
There are no guarantees that you will make money with stocks and no insurance against losing your investment.
The SIPC does insure your brokerage account against mismanagement of funds and unsuitable advice, but there is no protection against stock market losses.
Mitigating risk in the stock market is up to you as an investor by always diversifying and investing inside your risk tolerance.
>> More: Best Financial Advisors
Bottom Line: How to Buy Stocks
The first thing you want to do is establish your goals. Then, open a brokerage account and fund it.
Once you have established yourself at your brokerage firm, you can purchase the stocks of your choosing directly through their site.
Buying stocks is not as hard as it seems. It’s also not a get-rich-quick scheme for the majority of investors.
Beginners that are willing to do a little research and use discipline to maintain the buy and hold strategy are most likely to see success.
Our Favorite Brokers to Buy Stocks: