Wondering how to buy stocks? You’re not alone.
It doesn’t matter if you’re a newbie – the fact that you want to learn how to grow your wealth is worth noting.
Let’s take a look at the four main steps of buying stocks before digging any deeper:
- Step 1: Choose and open a brokerage account
- Step 2: Pick stocks you want to invest in
- Step 3: Execute your order (aka buy stocks)
- Step 4: Test and refine
Investing in the stock market typically refers to putting money into a share of a company. The idea is when a publicly traded company does well, the higher their stock prices will climb. For most people, investing in the stock market refers to places like the S&P 500, which is one of the major stock market indexes.
While there is some risk to investing in the stock market, that doesn’t mean you should opt out of it altogether. Sadly, even though the markets have climbed higher than they were before the crash in 2008, only 37% of people younger than 35 had money in the stock market in 2018. This is down from 52% in 2006 – 2007 right before the crash, according to a poll from Gallup.
However, don’t let the fluctuating prices scare you. If you do your research and make sure you understand what you’re getting into, you can grow your wealth. Besides, it’s a great way to earn money for some of the more important things in life, like buying a house.
Choose Your Preferred Brokerage
A brokerage account is similar to a bank account, except you’re using it to buy stocks. Many brokerages have services such as online education tools, customer service hotlines and in-person branches.
The good news is that it’s relatively easy to purchase stocks with a brokerage, because you can do so online. You can make stock transactions seamless either by logging in to a brokerage’s website or through its app.
Keep in mind that any time you buy stocks, you may need to pay fees, like trading commissions. Before deciding on a brokerage based on the fees alone, consider the following:
- How much support you want. If you’re the type of person who loves face-to-face interactions, then an online-only brokerage isn’t your best choice. You’ll also want to look at the types of tools a brokerage offers, like online chat, educational tools and guidance on investments.
- How much money you’re willing to invest. Depending on the brokerage and the type of investing you want to do, you may be required to have a minimum opening deposit. For example, TD Ameritrade doesn’t enforce minimums, but Ally Invest has a $2,500 minimum.
- How hands on you want to be with your investments. If all you want to do is open up a mutual fund account and let it grow passively, then you’ll want to find brokerages that provide this option. If you’re interested in making trades in individual stocks, then you’ll want a brokerage account that offers a wider range of features.
- How often you want to make trades. Every time you buy or sell a stock, you may need to pay a commission. Some brokerages offer discounts on bulk trades. If you’re the type that likes to set it and forget it, then look at the fine print to see if you could be charged inactivity fees.
Once you’ve decided on a brokerage, opening an account is pretty simple. You should be able to fill out an online application. You’ll be asked to provide proof of identification and a way to fund your new account. Typically, you can do so by mailing a check or making an electronic transfer.
Decide Which Stocks (And How Many) You’d Like to Invest In
Here comes the fun part: investing your money!
Before throwing your money at any type of stocks, you want to figure out what is best for you. Keep in mind that investing comes with risks (like losing money), but the following preferences depend on your risk tolerance and whether you want to be active with your investments.
- Individual stocks. Buying individual stocks means you’re investing your money into one company. For example, if you buy Coca-Cola stocks, you’re relying on Coca-Cola alone to increase their stock prices so you can earn some money. The good news is that you can earn a healthy sum of money. What you need to be aware of is that you’ll need to do careful research on the company and it’s one of the riskiest ways to invest. If you want to learn to time the market and actively invest, this could be the route for you.
- Stock options. Unlike buying stocks, where you’re part owner of a company, a stock option is a contract that gives you the right to buy or sell a stock at a predetermined price on or before a specific date. Think of it as a contract you set up with the brokerage.
- Mutual funds and exchange-traded funds (ETFs). Most passive and long-term investors prefer to go this route because it’s fairly hands off. Mutual funds and ETFs are micro shares in a bunch of companies, so you’re being exposed to either all or part of the stock market. For example, the S&P 500 encompasses stocks from the 500 largest companies in the U.S.
As you do your research, don’t let the breadth of information lead you to analysis paralysis. All you want is to do enough so that you can choose companies you want stock in. To do so, start with a company’s annual report, which is basically the management’s annual letter to shareholders. This document will give you a general overview of the goings-on of the business and give you some context behind the numbers in the annual report.
Other places to look include your brokerage’s website. It’ll provide documents such as quarterly earnings updates and SEC filings. You may even find tutorials on how to pick stocks using their tools.
Don’t feel like you have to invest a lot of money in the beginning. Think about starting small, like purchasing one or two shares so you can get a feel of what it’s like to buy stocks. You can make changes as you go.
Make Your Order
There are a lot of terms thrown around when you’re making orders. For now, learn about the two types you’ll most likely use: market orders and limit orders.
This type of order means you’re trading stocks when it’s at the current best available market price. The stock will be traded immediately and may not be the exact price you saw because it’ll fluctuate throughout the day.
Using a market order is best if you’re buying stocks that don’t fluctuate wildly in their prices. For example, you’ll want to do this for large and steady companies compared to startups.
This type of order will let you indicate when you want to trade a stock. For example, you can tell your broker to buy or sell a share when it reaches a certain price point. You can even set an expiration date for the order.
Limit orders are best if you’re buying more volatile stocks, like smaller companies. You can also consider limit orders if you want a certain stock price or when there’s short-term stock market volatility.
When you make an order, a broker still executes on your behalf and earns a commission when that happens. Typically, online trading has lower fees because these brokerages have removed a lot of the overhead fees that come with more traditional brokerages. You may be able to save on fees by buying shares directly from a company, so check with your brokerage to see if this is the case.
Stock Terms to Know
Here are a few terms that’ll be helpful when learning how to buy stocks.
- Annual Report: A comprehensive look at a company’s yearly activities and financial performance
- Ask: Price that a seller is willing to accept when you want to buy a stock
- Bid: A price that a buyer is willing to pay for a stock when you sell a stock
- Close: When the markets close or when a trade is finalized
- Dividend: A payment made by a corporation to its shareholders
- Spread: The difference between the lowest ask and highest bid price
- Stop/Stop-Loss Order: When an order is filled at a certain stop price
- Stop-Limit Order: When a predetermined price is reached and then the order is fulfilled based on this limit
Buying stocks as part of your wealth plan is a great idea, but you can refine your strategy over time. Some like to diversify using alternative investment strategies, such as having more cash on hand in a high-interest savings account or bond funds. Whatever you choose, do your research, start small and hopefully you’ll see your hard-earned money grow.
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