Buying stock has never been easier. If you have a little bit of money and a brokerage account, you can buy a piece of a publicly traded company. A stock is an ownership share in a business, and literally thousands of them trade on the stock exchange, making anyone – even a beginner – a part owner in the company.
Here’s how to buy stock and the steps you need to take to become a stockholder.
1. Choose your online broker
You will need to set up with a broker to buy stocks, but it only takes a few minutes. The broker lets you buy and sell stocks, holds the shares in an account for you and collects any dividends paid. You need to provide basic financial information to open an account and you can link your bank account with the brokerage to transfer money.
An online broker is a great first choice. Most brokers charge no trading commission on stocks and no account minimum to get started. But you can also go with a trading app, especially if you want to trade less frequently through a mobile device.
You can find a broker that suits your needs among the best brokers for beginners.
2. Research and analyze stocks to buy
If you are interested in buying individual stocks, you will need to do research and find out whether the stock is a good buy or a “bye”. And it can take a lot of upfront work if you want to be successful.
You’ll want to understand the company, its products, its balance sheet and its industry. So you have to read its filings with the Securities and Exchange Commission (SEC). This will give you a lot of information about what you are investing in and its potential. But you may also want to use some of the pros’ top techniques, which involve doing your own first-hand research.
From your research you can develop an investment thesis for the stock or discard it and look at another potential candidate. You’ll want to buy stocks that are poised to outperform over the years rather than stocks that will outperform in the next week or month. That is, you want to invest for the long term and think like a business owner, not a stock trader looking to make a quick buck.
To measure yourself, ask: “If the market closed tomorrow and I was unable to sell this stock, would I want to hold it for another ten years?” This allows your mind to focus on the right time frame.
When you find an attractive stock, pay attention to its ticker symbol, usually a three- or four-letter code.
3. Find out how much you can invest
You will want to determine how much stock you can buy now. If you’re just starting to invest, the good news is that you can invest with almost any amount, as many brokers allow you to trade fractional shares. So you can buy fractional shares, even on those really valuable shares. It’s okay to start small. With no-commission online brokers, your money won’t get eaten up by fees.
But real wealth is built by compounding your investments over time, ideally at regular intervals. That’s why you want to know not only how much you can invest now but also how much you can add to your account over time. This can allow you to take advantage of dollar-cost averaging, a process that spreads your purchases over time and reduces your risk.
If you’re investing more than a few thousand dollars, you may want to consider buying more than one stock so you can diversify and spread your risk.
4. Do Your Business
It is finally time to place your trade. Using the ticker symbol of the stock, you can enter an order with your broker. You also need to specify the type of order you want to place: market order or limit order:
- Market Order: In this way you can trade at whatever is the best price available at the time of sending in your order. You will not have control over the price at which you transact.
- Limit Order: This type lets you transact only at the price you specify or better. If you cannot get your price or better, the order will not be executed. You can set a limit order to be valid for up to three months, although some brokers allow them to sit for longer.
Market orders are better when you are trading only a few shares or when the stock is large and liquid. Limit orders work better on smaller stocks that do not trade many shares or when you are trading a large number of shares and do not want your trade to move the price.
Once the trade is executed, you own the stock.
5. Track Your Stock
Buying stock is only one part of the process of being a stockholder. You’ll also need to follow the company, track quarterly or annual earnings, and keep up with the industry. And as the company does well, you can allocate more money to the position. Then as your expertise grows, you can add more stocks to your portfolio.
The kind your stock will fall at some point, even if it’s only temporary. Understanding the company can help you decide whether it is time to buy or sell more stock at a discount.
Finally, if you want to start investing, you should know that you have other options. As Warren Buffett advises: “If you feel like spending six to eight hours per week working on investing, do it. If you don’t, invest in dollar-cost averaging index funds.
If you don’t want to spend time following your stocks, you have many ways to make money in the stock market, including index funds. Index funds often hold hundreds of stocks, offering the benefits of diversification without the extra work of analyzing and valuing individual stocks.
Here are some of the best index funds.
Buying Stocks: Frequently Asked Questions
Do I need a broker to buy stocks?
A brokerage account allows you to buy stocks and other securities (such as ETFs, options, mutual funds, bonds and more). You can open an account with an online brokerage, a full-service brokerage (a more expensive option) or a trading app such as Robinhood or Webble. Either of these options will allow you to buy stock in publicly traded companies.
However, your bank account or other financial accounts will not allow you to buy stocks. But your bank may operate a brokerage, so you can open an account with the brokerage and buy stocks there. For example, Bank of America owns Merrill Edge, JPMorgan Chase offers JPMorgan Self-Direct Investing, and Wells Fargo operates WellTrade.
Is now a good time to buy stocks?
The stock market goes up an average of 10 percent a year, although returns can fluctuate greatly from year to year. Some years stocks may decline 20 to 30 percent, while other years they may rise similarly. But experts recommend investing for the long term rather than trying to “time the market”. Timing the market means trying to find the best time to buy and sell.
Experts have a saying for this: “Timing the market is more important than timing the market.” That is, your investment returns – especially with a well-diversified portfolio – depend more on how long you stay invested than on how well you time your buy and sell points. Huh. In other words, research shows that passive investing outperforms active investing. So this is one way even amateur investors can beat the pros.
Do I have to pay tax on profits?
Any realized gains on your investments will create a tax liability in taxable accounts (that is, accounts that are not IRAs, 401(k) or other tax-advantaged accounts). You must pay taxes on any dividends as well as any realized capital gains – the stock that you sold for a profit.
The tax rate you pay depends on your income and how long you’ve had the protection. If you’ve held the security for less than a year, you’ll have a tax rate that’s the same as your income rate. If you’ve held the stock for more than a year, you’ll pay the long-term capital gains rate, which can be higher or lower than your short-term rate (and sometimes even as low as 0 percent).
Beginners interested in buying stocks should understand that trading is easy. But the most difficult steps in the process are researching your investments and continuing to follow through on your shares after you’ve bought them. If you’re just starting out, it’s helpful to go slowly and invest smaller amounts until you feel comfortable with the way you buy stocks.