Are you wanting to invest in the stock market but don’t know where to start? You’re not alone. Buying stocks is a simple process. But doing the research can be a bit overwhelming if it’s your first rodeo. But don’t fret. Read on for a step-by-step guide on how to buy stocks.
Table of Contents
Step 1: Setup a brokerage account
To buy stocks, you’ll need to apply for a brokerage account. With this account, you’ll be able to make monetary deposits to fund any future investment orders. And upon making a purchase (or any, the stocks will remain in the brokerage account until you trade them.
Types of brokerage accounts
There isn’t a one-size-fits-all brokerage account. The basic types of brokerage accounts are:
When analyzing brokerage accounts, you want to consider the following:
- Minimum deposit requirement: if you’re just starting out, you may only want to invest a small amount to get your feet wet. Once you’re acclimated with buying and selling stocks, you’ll beef up your portfolio. But until you reach that point, a discount brokerage account with minimal fees and little to no deposit requirement may be best.
- Short term goals: do you plan to hit the ground running? Do you need all the support you can get to maximize your investment in the shortest amount of time possible? If so, a full-service brokerage account may be the better choice.
Step 2: Evaluate your options
There are tons of stocks to choose from. So how do you narrow down your options and select the best fit for your financial situation? You can sift through mountains of financial data inundated with jargon you’ve never seen a day in your life.
A better idea: think about industries or businesses you have a keen interest in. Are there a few that you’d like to own a piece of? If so, start there. Otherwise, you can always ask your financial adviser for data on up and coming companies or pay attention to market trends in the media.
Once you have a list of top prospects, head on over to the company’s website and download a copy of the annual report. It’s an extensive document that provides an overview of how the company performed in the last year, along with detailed financial reports.
The U.S. Securities and Exchange Commission mandates that public companies provide this report to shareholders on an annual basis. But is usually available through the company’s website as well for the general public to see. If you’re unfamiliar with any of the terms listed, the broker’s website should have information and resources that can assist.
You may also want to consider monitoring the company’s performance before making a purchase decision. Steep fluctuations or signs of declining revenues could indicate that it may not be the right time to invest. (Most brokerage firms will also offer tools and resources to help you stay on top of what’s going on with the companies you’re considering).
Step 3: Get a quote
You’ll want to pay close attention to the information presented in the quote. Stock quotes, which are represented by ticker symbols that are abbreviations of the company, include:
- Bid: highest price per share a buyer wants to pay per share
- Offer or Ask Price: lowest price per share a seller will accept per share
- Historical information on trading volume
- Interactive resources to help gauge projected performance
Contact your broker to learn more or visit Nasdaq.com to retrieve a real-time quote.
Step 4: Place an order
Now that you’ve gotten all the technical/admin duties out of the way, it’s time to buy stock. But before you get too excited, it’s important to familiarize yourself with order types.
A market order ensures you get the number of shares requested, even if the asking price is a bit higher than your bid. This is usually the case when your primary concern is the share volume, and not price.
This type of order is best for investors who are in it for the long haul. Why so? Well, a slight spread, or the difference between the asking price and bid, shouldn’t make that much of a difference over time.
Let’s say you want to buy 75 shares at $150 and the quote states:
- Bid: $149 (75)
- Ask: $150 (60)
- Last: $151 (100)
If the seller agrees to issue 75 more shares at $153, your market order will be for 60 shares at $150 and 15 at $153.
A limit order ensures the broker purchases shares at the desired price point. So there’s a possibility you may not receive the number of shares you want until the price point decreases.
Let’s say you want to buy 80 shares at $160 and the seller is only offering 45 at that price point. If you decide to execute a limit order, you would get 45 shares and wait for sellers offering at least 35 or more shares at $160 to reach 80 shares.
When you place a limit order, understand that there are no guarantees your order will be filled since market orders are executed first.
And if it takes several rounds of trading to get the desired volume of shares, expect a hefty amount of broker fees because commissions are tacked on after each transaction. In this case, it may be in your best interest to execute a market order and pay a bit more per share since the cost of commissions may wipe out the cost-savings per share of stock.
You should also be mindful of all-or-none (AON) limit orders, which indicate to the seller that you’ll only purchase if the price is at or below the amount of your bid. Furthermore, the requested amount shares must be offered during that specific bid.
If you want to leave the order on the table for an extended period of time, it can be coded as good till canceled (GTC). The timeframe can span from a few to several months.
Stop orders are driven by price and are only filled when the requested number of shares reach the stop price. There are two types of stop orders you should be aware of:
- Stop-limit order: functions like a limit order because it’s only executed at the “stop-price”. However, you may not get the number of shares you want.
- Stop-loss order: functions like a market order, but the primary difference is the entire order will only be filled when the price is at or below the “stop level”.
Before you can execute a market or limit order, you’ll need to decide on the number of shares you wish to purchase. There’s no right or wrong amount, and some newbies prefer to start small and scale up once they’re a bit more comfortable with how stock trading works.
The next steps
Kudos to you for buying your first stock. It’s a great first step toward building wealth and helping secure your financial future. And even if your first round doesn’t turn out as planned or your experience steep market downturns, don’t throw in the towel right away. Remember why you started and focus on the light at the end of the tunnel, or your future earning potential.