How to buy a stock: A step-by-step guide to help you get started investing

This post was originally published on this site

© Business Insider How to buy a stock: A step-by-step guide to help you get started investing

© Alyssa Powell/Insider Table of Contents: Masthead Sticky

  • The easiest and most practical way to buy stock is to open an account with an online broker or investment platform.
  • When deciding which stocks to invest in, it’s important to do your own research.
  • Having clear investment goals will help guide your overall strategy, but building a diversified portfolio is important for all investors.

It’s no secret that investing in stocks can be an alluring way to build wealth. And if you’re a beginner investor, we’re here to reassure you that it isn’t as difficult as it seems. All you need to do to get started is open an online investment account.

Whether you’re looking to contribute a large chunk of your savings or simply dip your toes in the proverbial investment waters, here are five key steps to follow when buying your first stock and go on to curate and develop a portfolio.

Step 1: Open a brokerage account

Stocks are bought and sold on stock exchanges, but you can’t directly buy from them. To gain access to the marketplace, you need to open a taxable brokerage account.

Brokerage accounts work similar to bank accounts, except they’re used to buy and sell securities. You choose a provider and open the account online, move money into it, and you’re ready to buy stocks in a few clicks.

There are many licensed brokers to choose from, and the decision revolves around your individual needs and priorities. When it comes to choosing a broker, there are three main options:

  • Full-service brokers: “Traditional” full-service brokers offer a variety of services including specialized research and advice, retirement planning, tax assistance, estate planning, access to IPO shares, and more. Because of this, they cater to affluent clients who are able to take on the high account fees.
  • Discount brokers: This type of broker leaves you to make your own decisions. Discount brokers typically just trade on behalf of clients but don’t offer specialized investing advice. While they once were the exception, they are now the norm, preferred by investors because they’re more affordable and charge no commission fees. What they lack in specialized advice, they usually make up with a vast array of tools and educational resources.
  • Robo-advisors: Robo-advisors are automated investing platforms that select and manage investments on your behalf based on your specific goals and timeline, typically following a passive investing strategy by investing your money in inexpensive ETFs or index funds. They appeal to the “set it and forget it” type of investor who prefers to be more hands-off.

It’s worth noting that brokers aren’t just an investing platform, but tools for education, too. Once you open a brokerage account, you have access to research and analytical tools, so it’s a good idea to get a sense of these resources when making your decision.

Most broker platforms will give you access to company fundamentals, including its prospectus, quarterly earnings, as well as relevant ratios and growth projections, to garner a more robust understanding of where a security currently stands and where it might be headed.

Quick tip: Need more help making a decision? See our expert-reviewed picks for the best online brokerages.

Step 2: Research and choose the stocks you want to buy

The stock market features thousands of publicly traded companies, each with different offerings. If you find yourself getting overwhelmed, remember that when you buy stock, you’re buying partial ownership of the company. So a logical place to start is to ask yourself what companies and industries interest you.

Once you narrow your options – perhaps you’ve identified a few companies in an industry you’re passionate about – it’s time to think like an analyst and do your research. The best place to start is the company’s annual report, formally known as Form 10-K, which provides a comprehensive overview of its financials as well as a letter to shareholders.

There are other countless strategies when it comes to picking stocks. Another way to think about evaluating what to buy is to design your portfolio with an investing strategy in mind.

For example, if you believe stocks ought to pay you a steady stream of income, you might want to explore dividend stocks. If you have a high tolerance for risk and are curious about early-stage growth companies, consider growth stocks. On the other hand, filling your portfolio with value stocks means finding companies that are underpriced, with the idea that they will grow and outperform the overall stock market over time.

Quick tip: To help you narrow the field, consider using a stock screener. Stock screeners can help you filter through companies based on specific criteria, and ensure any investments added to your portfolio fit into your strategy.

Generally speaking, you’ll have access to all the research material you need to come to your own conclusions, but it takes time and effort to hone your analytical skills. Here are a few more tips to keep in mind when building your portfolio:

Think long-term. Unless you’re looking to trade frequently and turn a quick profit, long-term investing is considered the safest way to go. That’s because long-term investments almost always outperform the market during a limited period of time, and impulsive or emotional trading can considerably inhibit investor returns.

Diversify your holdings. Even if you’re starting small, think about a diversified portfolio – which simply means owning a variety of investments within and across asset classes to mitigate risk and guard against volatility.

That’s why many financial advisors recommend that beginners get into the stock market by buying mutual funds or ETFs, which allow you to buy a “basket” of stocks at a low cost. Index funds, in particular, can be the foundation of a well-diversified portfolio.

Be mindful of taxes. Choose tax-favored investments, and aim to capitalize on long-term capital gains tax treatment when possible by, in accordance with our advice to think long-term, holding on to your investments as long as possible.

Step 3: Decide how much you want to spend

There’s no minimum amount of money needed to start investing in stocks. You can always start small, and add to your portfolio over time.

Because investing can have unpredictable returns, it’s important to invest only that which you can afford to lose and to generally be mindful of your risk appetite.

The amount of money you should invest ultimately comes down to the price and number of shares you’re seeking to buy. But also keep in mind how much it may take to properly diversify your portfolio. To find a stock’s price on a brokerage platform, simply search for the company’s name or ticker symbol.

If the share prices of stocks you’re interested in are financially out of reach, you can also explore fractional shares. Fractional shares allow you to buy fractions, or parts of a stock. If, for example, a single share is $500, you can buy $50 worth of the stock, giving you a fraction worth 10% of a share. Nowadays, many online brokers from Fidelity to Robinhood offer fractional shares.

Important: When you open your brokerage account, you may be asked if you’d like a cash account or a margin account. When you invest on margin, you borrow money from your broker to buy securities. Keep in mind you’ll have to pay interest and the practice is generally not advised if you’re just starting out.

Step 4: Execute trades and choose your order type

After you’ve opened an account, outlined your goals and strategy, and conducted research on which stocks or funds to invest in, it’s time to act. Normal trading hours for US stock exchanges like the NYSE and Nasdaq are 9:30 a.m. EST to 4 p.m. EST.

Before buying a stock, you’ll need to select an order type, which informs the purchasing process. You have two main options when executing trades through a brokerage account: market and limit orders.

  • Market orders: These types of orders tell your broker to purchase the stock or security immediately, without a guarantee for its price. Market orders are more common than limit orders, especially for those looking to invest long-term, and among their benefits is the fact that as long as there are interested buyers and sellers, your order is guaranteed to be executed.
  • Limit orders: If market orders instruct your broker to get you into a stock as fast as possible, a limit order specifies a certain price for your order. The order gets fulfilled only if there’s a seller who’s willing to part with the shares at your specified price. Limit orders give investors more control over the price they pay for a security. Just be careful with limit orders, because some brokers charge more for these more technical, complex trades.

To place your stock order, navigate to the section of your brokerage’s platform and punch in the necessary information. Once you place your order, your portfolio will immediately update to reflect your newly purchased shares.

As you think about when you might want to sell your shares, keep in mind that stocks carry quite a bit of risk, and following a buy-and-hold strategy will help you safeguard against volatility so you can ultimately benefit from the long-term profits.

Step 5: Continuously build your portfolio

You’re never truly “done” building your portfolio because it’s an ongoing process that becomes more efficient as you gain experience and refine your goals. After some time, reevaluate your holdings: Are they diversified enough to guard against risk? Might your portfolio be too heavily focused in one industry?

Keep up with the progress of your investments, but don’t place too much weight on daily fluctuations because, as previously mentioned, it’s best to think long-term when buying stocks. Periodically ask yourself or your financial advisor whether you’re on track to meet your goals. If you aren’t, it might be time to tweak your portfolio allocation.

The best time to sell your stocks is when you need the money, and this depends on your predefined timeline and whether your investment goals are short or long-term. If you’re considering selling a stock, remember why you bought it to begin with and consider whether it still aligns with your goals.

The financial takeaway

Investing in stocks for the first time might seem overwhelming, but can be simplified by establishing clear goals and utilizing all the tools provided by your online broker.

The first step in the investing process is opening a brokerage account, and there are a few key considerations when curating a portfolio, like identifying your timeline and risk tolerance, making a conscious effort to diversify, and deciding what type of stocks are most appropriate for meeting your goals.

What is stock? Learn the basics of investing in a public company What is a stock exchange? Understanding the marketplace where shares are bought and sold A brokerage account is the first step to becoming an investor, allowing you to buy stocks, bonds, and other securities Stock market indexes: What they measure and how they can guide your investing