In this post, you’ll learn how to buy stocks. Buying stocks is not as complicated as it seems, however, you will need to do some research and learn all about it before making your first investment.
To buy stocks, you’ll need the assistance of a licensed stockbroker who’ll help you purchase securities. But before you can decide on a stockbroker, you need to first figure out what type of stockbroker is right for you.
There’re basically five categories of stockbrokers available today ranging from cheap and simple order-takers to more expensive brokers who provide full-service, in-depth financial analysis, advice, and recommendations.
The basic categories of stockbrokers include:
Table of Contents
Types of Brokers
1. Online/Discount Brokers
Online brokers are order-takers that provide the least expensive way to start investing since they have no office to visit and no certified financial planners or advisors to assist you.
You can only interact with an online/discount broker via the phone or through the internet. Cost is usually based on a per-transaction or per-share basis which lets you open an account with very little money.
Opening an account with an online/discount broker lets you buy and sell stocks instantly with just a few clicks.
Since online/discount brokers provide absolutely no stock tips, investment advice, or any type of investment recommendations, you are on your own but you will get technical support for the online trading system
Online brokers also offer investment-related website links, research, and resources, but these are third-party providers.
If you feel you have the knowledge to take care of the responsibilities of directing your own investments or if you want to learn how to invest without making a large financial commitment, then, this is the way to go.
2. Discount brokers with assistance
Discount brokers with assistance are the same as online brokers but they are likely to charge a very small account fee to pay for the extra assistance.
However, this assistance is just by providing a little more information and resources to help you cope with your investing.
Discount brokers with assistance can be the same companies as the basic online/discount brokers that offer upgradeable accounts or services but they don’t give you any type of investment advice or recommendations.
3. Full-service brokers
Full-service brokers are also called traditional brokers and they take the time to sit down with you and know you both personally and financially.
Full-service brokers look at factors like lifestyle, personality, marital status, age, income, assets, risk tolerance, debts, and more.
They then work with you to develop a financial plan that best suits your investment goals and objectives.
This type of brokers can also assist you with tax advice, estate planning, budgeting, retirement planning, and any other type of financial advice that’s why they’re called full-service brokers.
Full-service brokers can help manage all of your financial needs now and for the rest of your life if need be. They are for those who want everything in one package.
In terms of fees, full-service brokers are more expensive than online/discount brokers. Accounts can be usually set up with at least $1,000.
4. Money managers
Money managers are like financial advisors but may take full care of a client’s account hence the term “manager”.
They are skilled investment experts that handle very large portfolios of money, and thus, charge heavy management fees based on the assets under management and not per transaction.
Money managers are for people with substantial incomes who prefer to pay someone to fully manage their investments.
The minimum account holdings can range from $100,000 – $250,000 or more and may charge upwards of 1% per year of assets under management.
Robo-advisors are new digital platforms that provide automated, algorithm-driven financial planning services with little or no human supervision.
A Robo-advisor takes information from you about your financial situation and future goals via an online survey and then uses the data to offer advice and automatically invent your assets.
The best Robo-advisors offer easy account setup, account services, portfolio management, and security features, robust goal planning, comprehensive education, attentive customer service, and low fees.
Robo-advisors are usually very inexpensive and require very low opening balances so that almost everyone can benefit from a Robo-advisor if they decide.
How to buy stocks
To buy stocks, you will first need a brokerage account which you can set up in just 15 minutes. Then, once you add money to the account, you can follow the steps below to find, select, and invest in individual companies.
At first it may seem confusing, but buying stocks is really straightforward.
Here are few steps to help you buy your first stock:
1. Select a stockbroker
Selecting a stockbroker is the first step you have to take if you want to buy stocks. If you’re just starting out and have little money to invest, go for an online/discount stockbroker as it’ll be easier for you to buy stocks via the broker’s website.
It is very easy to open an online brokerage account. You just need to complete an account application, provide proof of identification, and choose whether you want to fund the account by mailing a check or transferring funds electronically.
You can also use a full-service stockbroker or buy stocks directly from the company.
2. Research the stocks you want to buy
Once you have set up and added funds to your brokerage account, it is time to dive into the business of picking stocks. You can start by researching companies you already know from your experiences as a consumer.
Do not let the flood of data and real-time market rotation overwhelm you as you conduct your research. Your objective should be simple. Just look for companies you want to become a part owner.
Once you have identified these companies, then do a little research.
You can start with the company’s annual report specifically the management’s annual letter to shareholders.
The letter will give you a general report of what’s happening with the business and provide context for the numbers in the report.
Next, get information and analytical tools such as SEC, conference call transcripts, filings, quarterly earnings updates, and recent news from your broker’s website to evaluate the business.
Some online brokers even provide tutorials on how to use their tools and also provide basic seminars on how to pick stocks.
3. Choose how many shares to buy
You shouldn’t feel pressured to buy a specific number of shares or fill your whole portfolio with stock all at once.
As a new stock investor, consider starting small by buying just a single share to get a feel for what it’s like to own individual stocks and whether you’re brave enough to ride through the rough patches with minimal sleep loss. Then, you can add to your position as time goes on as you master the business.
You might also want to consider fractioning shares – this is a new offering from online brokers that let you buy a portion of a stock rather than the full share.
This means that you can get into pricey stocks – big companies like Amazon and Google are known for their four-figure share prices with a much smaller investment.
Other brokers that offer fractional shares include Charles Schwab, SoFi Active Investing, and Robinhood.
4. Decide your stock order type
Don’t be swayed by all those stock numbers and meaningless word combinations on your broker’s online order page.
Here are some basic stock trading terms you need to know:
- Ask – the price that sellers are willing to accept for the stock
- Bid – The price that buyers are willing to pay for the stock
- Spread – The difference between the highest bid price and the lowest ask price.
- Limit order – A request to buy or sell a stock only at a certain price or better
- Market order – A request to buy or sell a stock at the best available price.
- Stop (or stop-loss) order – When a stock reaches a certain price, the “stop price” or “stop level”, a market order is carried out and the entire order is filled at the prevailing price.
- Stop-limit order – Once the stop price is reached, the trade turns into a limit order and is filled up to the point where certain price limits can be met.
There’re lots more fancy trading moves and complex order types but today, investors have built successful careers buying stocks only with two order types i.e. market orders and limit orders.
With a market order, you are specifying that you will buy or sell the stock at the best available current market price.
Since market order puts no price parameters on the trade, your order will be carried out instantly and fully filed except you are trying to purchase a million shares and attempt a takeover coup.
Don’t be surprised if the price you pay/receive (if you’re selling) is not exactly the price you were quoted just a few seconds before.
Bid and ask prices fluctuate constantly throughout the day that is why market order is best used when buying stocks that don’t experience wide price swings.
Things to know
- A market order is best for buy-and-hold investors who don’t care much about the small differences in price but make sure that the trade is fully executed.
- If a market order trade is placed “after hours” (when the markets have closed for the day), the order will be placed at the current price when the exchanges next open for trading.
- Check your broker’s trade execution disclaimer. It is important to check your broker’s trade execution disclaimer as many low-cost brokers today put all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or at a particular time or day of the week.
With a limit order, you get control over the price at which your trade is executed.
For example, If ABC stock is trading at $100 per share and you think a $95 per share price is more in line with how you value the company, your limit order tells your broker to hold tight and execute your order only when the ask price drops to that level.
If you are the one selling, your limit order tells your broker to part with the shares when the bid rises to the level you set.
A limit order is a good tool is you’re buying and selling smaller company stocks which tend to experience wider spreads depending on your activity.
Limit orders are also good for investing during times of short-term stock market volatility or when the stock price is more important than order fulfillment.
There are some conditions you can place on a limit order to control how long the order will remain open.
For instance, an “All or None” (AON) order will only be executed when all the shares you wish to trade are available at your price limit.
A “Good for Day” (GFD) order will expire at the end of the trading day even if the order has not been fully filed.
A “Good till Canceled” (GTC) order remains in play until the client pulls the plug or the order expires.
Things to know
- A limit order may guarantee the price you will get if the order is executed but there is no guarantee that the order will be filed fully, partially, or even at all. A limit order is placed on a first-come, first-served basis, and only after market orders are filed and only if the stocks stay within your set parameters long enough for the broker to execute the trade.
- A limit order can cause you more in commission than a market order. Limit orders that can’t be executed in full at a time or during a single trading day may continue to be filed over subsequent days, with transaction costs charged every day a trade is made. If the stock never reaches the level of your limit order before it expires, the trade will not be executed.
5. Optimize your stock portfolio
You can optimize your stock portfolio by:
- Ensuring you have the right tools for the job
- Be mindful of brokerage fees as these can significantly erode your returns
- Consider investing in mutual funds – mutual funds let you buy many stocks in one transaction.
Still trying to figure out how to buy stocks? Just know that before buying stocks, you have to decide whether to go through an online brokerage firm or through a face-to-face broker.
Once you’ve done that, evaluate a stock and choose the prices you would like to purchase at, so you know whether to make a “market” or “limited” order.
You can also buy some stocks directly from the company to save brokerage fees.
Frequently Asked Questions
If you open a brokerage account with no account minimums and no transaction fees, you could start investing with just enough to buy a single share. Depending on the company, you could invest as little as $10 but remember that cheap stocks don’t necessarily make good buys.
Some brokerages also let you buy fractional shares that means if you only have $100 to invest, you could buy a portion of a stock like Google or Amazon which has long traded for over $1,000 per share. Just know the more you invest, the higher the potential returns over the long term.
That depends on the amount you want to invest in. If the share price is $100, and you have $1,000 you’re willing to invest, you could buy 10 shares.
However, if your brokerage does not allow fractional trading and the numbers are not that clean, you will have to round down. If the stock price is $110, and you have $1,000 to invest, you will only be able to buy nine shares, as ten shares would cost $1100.
The truth is, you will never know the exact time to buy stocks. But if you are investing for the long term (five years and above), then buy stocks as soon as you have the money available so that even if the market falls soon after investing, you will still have lots of time to make up those losses.
The only way to guarantee you will be a part of any stock market recovery and expansion from the beginning is to be invested before recovery starts.
Owning stock and owning shares typically mean you have ownership or equity in a company. Shares are usually used to refer to the size of an ownership stake in a specific company while stock means equity as a whole. For instance, you might hear an investor say “I bought 10 shares of Amazon” or “I have stock in Amazon”.
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