Have you decided to invest in stocks but don’t know where to start? Fear not. Investing is a straightforward process once you’ve set yourself up.
Buying stocks starts with research, and if you make the right investment choices, it ends with more money in your account. A lot more money. It also requires maintenance and knowing where to find the information you need. Sounding good so far?
In this article, I’ll take you through how to buy stocks, from opening an account to actually buying them.
Step 1 – Learn about the stock market and how it works
If you truly know nothing about the stock market, it’s time to read a beginner’s guide. A great place to start is with MU30’s article Why The Stock Market Really Is The Best Place To Grow Your Money. From there, read How To Get Over Your Fear Of The Stock Market And Start Investing. Both of those should give you a good level of comfort with the market.
And before you decide to invest, you should also consider the risk and make sure you have enough money to cushion against losses.
If you’re a beginner, you may want to consider working with a financial advisor. While a human financial advisor can help you calculate your risk and make better investment decisions, you can also try using a robo-advisor.
Robo-advisors use algorithms to help you build your portfolio by showing you better investment choices. Robo-advisors also cost less—as low as a 0.25% expense ratio compared to the 1% charged by human advisors.Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”
Where to buy stocks
When it comes to investing in stocks, most people buy them online through an exchange such as the New York Stock Exchange or NASDAQ.
You can purchase individual stocks, but you might also decide to invest in a mutual fund or an exchange-traded fund (ETF). No matter how you do it, your stocks get traded on the stock exchange. You can track the prices on each trade through a broad market index, such as the S&P 500 or the Dow Jones.
Buying and selling stocks online works like buying and selling items at an auction house—just quieter, since you can’t hear the auctioneer shouting. The seller sets an asking price that they hope to reach. As the buyer, you bid what you are willing to pay as you try to get the lowest possible price.
To purchase available stocks, you first need to know how to find them. Companies will list their available shares via initial public offering (IPO). Of course, your brokerage—whether human or online—can also help you find the stocks that best match your interests and objectives.
Step 2 – Open an online brokerage account
You can invest in stocks with a 401(k) through your employer. However, if you want to invest individually, you’ll need to open an online brokerage account.
Depending on your investing goals, you may choose to open either a regular taxable account or an individual retirement fund (IRA). As the name suggests, a regular taxable account taxes any investments you make with that account.
When you open an IRA, your primary objective is to save money for retirement. IRAs are tax-advantaged. A Roth IRA allows your post-tax money to grow tax-free and you don’t have to pay taxes on the back-end when you withdraw that money. Traditional IRAs, on the other hand, allow for a current-year tax-deduction on your contributions, making them like a 401(k).
You can also choose between a managed account and one you handle on your own. With a managed account, you have the help of a financial advisor—human or automated. The broker sits between you and the stock exchange as you buy and sell.
Consider the services offered by each broker before you open an account with them. Some, like You Invest by JP Morgan, give you commission-free trading or $0 inactivity fees. Others offer access to research and education tools or connect your different accounts to enable you to transfer funds more efficiently.Disclosure – INVESTMENT PRODUCTS: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Once you find the right brokerage account for you, opening one only takes 15 minutes in most cases. Some do not require an initial deposit. However, you will need to transfer funds before you can start investing.
Platforms like E*TRADE, for example, work well for beginning investors. They don’t require an initial deposit, and they give you tools like insights and their Stock Plan Tax Center for tax information and other resources.
Step 3 – Do your initial stock research and screening
Stock screening should be a part of your research process. The process can narrow your stock search and help improve your investing decisions by showing you the best stocks for your goals.
Quantitative and qualitative research go together like bread and butter. I advise you to do the qualitative research the old-fashioned way—by looking up company information. For the quantitative analysis, you’ll need a stock screener.
Stock screeners will look for companies that meet specific criteria related to your investment goals. According to the American Association of Individual Investors, you should determine your stock goals before using a screener. Some screeners will search only for large-company stocks or an otherwise niche category.
You can find stock screeners with these companies:
- Zacks Trade.
- Google Finance.
- Stock Rover.
- Chart Mill.
Once you choose the one that best meets your stock screening needs, answer the screener’s questions to filter your results. Answering accurately will help the screener give you the best stocks for your financial goals.
While stock screeners allow you to perform the qualitative research you need, make sure you personally run searches on different companies. Review their financial information such as the Form 10-K and Form 10-Q they file each year with the U.S. Securities and Exchange Commission.
You should also look at historical data, like how the company has fared through challenges like recessions, changing business models, and delivering overall value for its shareholders. Review the company’s annual report and letter to shareholders to get a better idea of its numbers.
Related: How To Invest In Stocks
Step 4 – Determine the stocks you want to buy
With all the stocks available, how do you choose which ones to purchase? I recommend starting with companies where you feel an affinity and a desire to invest. For example, do you love Apple products? Perhaps you start there.
When you’re trying to decide where to invest, remember that the S&P 500 has 11 sectors to choose from. You may first consider putting your money into the largest or most lucrative sector—but think again.
If you were to start a company, you wouldn’t want to go into real estate when you’re actually interested in health care, right? Treat your stocks the same way.
Act like you want to own the company you’re investing in and buy stocks accordingly. Consider your investment strategy and goals, then decide whether value investing, dividend stocks, or growth stocks work best for you.
Before you decide on a type of stock to purchase, watch the stock market, and consider your budget. Even though the market fluctuates, and you can’t always predict its direction, seeing which companies consistently have high-value stocks or low volatility can help you choose a more stable investment.
You may have heard people say it’s not worth buying less than 100 shares of a company’s stock, but you can start with just one. If you’ve never experienced the world of stocks, it’s better to start slowly and learn the process before you go all in.
My father-in-law, for example, is notorious for this. He told me the other day he bought two shares of Tesla stock. Granted, Tesla’s stock has gone up in price, but this just goes to show that it’s the dollar amount you have invested, not the number of shares.
So, instead of focusing on how many shares you buy, focus on their value. If you buy 100 shares at five cents each (a ridiculous example, but meant for illustration), you’ll only pay $5 for those hundred shares.
However, many brokers charge a commission fee. With a $5 fee, you’ll pay the same amount for merely performing the transaction as you would for all of those shares. If the fee alone equals 100% of your investment, you should reconsider buying those shares.
Also, consider how much the stock is likely to grow. You want to know the difference between the price at which you wish to sell and the current price. If that difference is worth it to you, consider buying the stock.
If you’re not ready to invest in whole shares, some brokers offer fractional shares. Robinhood, for example, now allows you to purchase fractional shares as small as 1/1,000,000 of a share. When the cost of a share is higher than what you have available, fractional shares let you invest in pieces of that share. Fractional shares can also increase portfolio diversity because they allow you to invest in more at a lower cost.
Step 6 – Choose an order type and buy
You have a choice from four order types when you buy your stock:
- Market order: A market order allows you to buy or sell your stock immediately. That doesn’t guarantee you’ll get it at a specific price, though. If the market spikes or drops suddenly, you may pay more or less than expected.
- Limit order: Limit orders can fall into buy limit or sell limit categories. With a buy limit, you execute an order to buy a stock at the current price or lower. A sell limit allows you to sell a stock at the current asking price or higher.
- Stop order: With a stop order, you specify a stop price at which you want to sell or buy a stock. Once the stock reaches the stop price, you execute the order to buy or sell it.
- Buy/sell stop order: When you don’t want to buy a stock over a specific price, you can execute a buy stop order. Likewise, a sell stop order allows you to sell a stock for no lower than the price you specify. This type of order helps you mitigate losses to avoid buying or selling above or below your stop price.
Many investors only use market and limit orders. You may want to start with those two types to get a feel for how to buy stocks.
Investors can also trade using more complex order types than those I’ve listed here. However, as a beginner, you can minimize your losses by making less complicated trades first.
Step 7 – Monitor, evaluate, and rebalance as necessary
Just like when you own a house or a car, your stock portfolio needs maintenance if it’s going to benefit you in the long term.
Stock investing isn’t a set-and-forget venture. You still have to monitor your portfolio and stock indexes, evaluate your stocks, and rebalance your portfolio regularly.
Monitoring your stocks ensures that you have the percentages you want for each stock in your portfolio. However, be sure also to follow the stock index so that you can buy or sell your stocks at the optimal times.
Sometimes, when you think you’ve mastered a skill, you need to go back to basics. That concept applies to stocks, too. I think most new investors should evaluate their stocks at least once a week.
You should also evaluate your investment goals, even if you do it less often. Checking in with your investments and goals keeps you on track to achieve them and prevents you from straying toward investments that don’t benefit you.
Once you’ve evaluated your investments, it’s time to rebalance your portfolio. Rebalancing your portfolio helps keep your goals and portfolio in alignment.
Rebalancing your portfolio means to buy or sell stocks to restore your desired percentages and to maintain the desired diversification. Whether you rebalance monthly, quarterly, or annually, be sure to make room to allow your investment goals to evolve.
When you’re learning how to buy stocks, start with research. Find the best people and tools to help you along your journey. Be objective-driven. Knowing your investment goals and using the resources available will help you before you even make your first purchase.