Have you decided to invest in stocks but don’t know where to start? Fear not! Investing is actually 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?
Let’s go over how to buy stocks — from opening an account to actually buying them.
Step 1: Open a brokerage account
Once upon a time, you could only buy stocks through an in-person broker, who would determine how you should allocate your portfolio.
Not anymore. While you can still go the old-school route with a traditional brokerage, there are also now online brokerages and robo-advisors that make buying stocks way more accessible to anyone who has an internet connection and a smartphone.
So, which should you go with?
Option 1: Traditional brokerage
These are the OGs of the investing world — the ones who were around before the internet was a thing. If you want the comfort of a long-standing name or a financial advisor to hold your hand, a traditional brokerage may be for you.
The downside of traditional brokerages is that hand-holding tends to come with hefty fees. It’s one of the reasons that, historically, investing was exclusive to the already wealthy.
Note that if you want the name, but not the personal assistance, you can still get that. Most traditional brokerages now offer online services, so you can DIY it.
Option 2: Online brokerage
These are – or were – the new kids on the block, opening up the world of investing to people who don’t want to (or can’t) pay high fees, who are willing to give it a go on their own, and who aren’t afraid to find their way around an app.
While they used to be fairly bare-bones, the best online brokerages now offer free educational resources and almost no commission fees.
Option 3: Robo-advisor
You could say a robo-advisor gives you the best of both worlds: a DIY account but with someone (or, rather, something) making your investment decisions for you. That’s because instead of a human choosing which stocks you should buy, a computer algorithm does it for you.
You just tell the robo-advisor what your goals are and how much risk you’re willing to take on, and the algorithm takes it from there. It sets up your investments and even rebalances your portfolio as the stock market shifts.
If you’re a set-it-and-forget-it kind of person, the best robo-advisor options may be your ideal brokerage account.
How to choose a brokerage
Keep in mind that brokerages aren’t quite as siloed as we’ve explained them above. Some traditional brokerages now offer robo-advisors. And some online brokerages now offer human advisors. So, it is possible to get a mix-and-match service.
No matter your investing style, when you’re shopping around for brokerages, you’ll want to keep the following factors in mind:
- Services they offer (robo-advisor, human support, etc.)
- Investment options (individual stocks, ETFs, fractional shares, crypto if you’re into that, etc.) — more on this in a bit
- Commissions and fees
- Account minimum
- Access to educational resources
- Customer service
Step 2: Choose your account type
Once you’ve picked which brokerage you want to go with, it’s time to pick the type of account you’d like to open.
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. IRAs, on the other hand, are tax-advantaged. With these, your primary objective is to save money for retirement. There are two types of IRAs:
- 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 allow for a current-year tax deduction on your contributions, making them like a 401(k).
As mentioned above, 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 (i.e., robo-advisor). The broker sits between you and the stock exchange as you buy and sell.
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.
Step 3: Stock research and screening
If you’re planning to handpick stocks, then stock screening and the best stock tracking apps and websites should definitely be a part of your research process.
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. Some screeners will search only for large-company stocks or an otherwise niche category.
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.
Step 4: Pick 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? If you’re a die-hard environmentalist, you probably wouldn’t go into oil drilling. 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.
Again, this is only if you’re going the DIY route and choosing your own stocks. If you’re going with a robo-advisor, you can skip this step, as well as steps 5 to 7, completely. (Although we still think it’s smart to know how buying stocks works, even if a computer is doing it for you.)
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, or pieces of that share. Fractional shares can also increase your portfolio diversity because they allow you to invest in more at a lower cost.
You may also want to consider ETFs, or exchange-traded funds. These are kinda like package deals of securities (stocks, bonds, etc.). With ETFs, rather than investing in just one company, your investment covers several companies that are part of that “package.” For people who don’t like to put all their investment eggs in one basket, ETFs are a good option.
Step 6: Choose an order type and buy
You have a choice of 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 (unless you’re using a robo-advisor, but even then, it’s a good to have some idea as to where the algorithm is putting your money). 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 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 helps keep your goals and portfolio in alignment.
When you rebalance, you 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.