Investing doesn’t have to be scary, even if you’re just a beginner. In this article, I outline how to buy stocks for the first time.
How To Buy Stocks: The Complete Guide For Beginners
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.
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 accounttep 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.
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.
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.
Step 5 – Decide on the number of shares
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.
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.
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.