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6 Steps to Learn How to Buy Stocks
Do you want to get started with stock investing to build your wealth? Here's what you need to do.
So you've decided to invest in the stock market, and you even have some ideas about which stocks you want to buy. But how do you actually purchase those shares?
How do you actually buy shares of stock?
Fortunately, the process of buying your first shares of stock online is relatively quick and easy. Here's a step-by-step guide to start your stock investing journey.
1. Open a brokerage account
First, you'll need a brokerage account to buy stock. Consider two main factors when selecting an online stock brokerage:
- What the brokerage offers: Does the brokerage firm offer every product and service you need? Some brokerages publish excellent educational resources for new investors. Others provide access to stock research and analytical tools. Some online brokerages maintain branches where you can receive guidance in person. Perhaps other features, such as the ability to trade international stocks or buy fractional shares, are important to you. Not all brokerages offer these.
- The user-friendliness of the brokerage platform: Is the brokerage's platform easy to navigate? If you want to trade using your mobile device, then the brokerage's mobile interface needs to be well-designed. Many of the largest brokerages allow you to use play money to experience their trading platforms before you invest, so try a few to decide which platform you like the most.
Most major online brokerages, such as Charles Schwab (SCHW 0.99%), TD Ameritrade(NASDAQ:AMTD), and others, have recently eliminated trading commissions, which largely takes cost out of the equation when choosing a brokerage platform.
Once you've chosen a brokerage, you'll need to complete a new account application. This is typically quick and easy, but you'll need to have photo identification handy, such as a driver's license and your Social Security number. You'll also need your bank account information if you want to fund your new brokerage account using your checking or savings account. You can choose to open a standard brokerage account, or instead establish an individual retirement account (IRA), which confers some pretty nice tax advantages.
Another decision you may face is whether to establish margin privilege for your new brokerage account. Having margin privilege enables you to buy stocks with money borrowed from your brokerage. While investing on margin is generally not a good idea, establishing margin privilege can confer some other benefits. For example, with margin privilege, you may begin trading in your brokerage account before your deposited funds have cleared.
2. Decide which stocks you want to buy
Without going too deep into the many possible methods of analyzing and selecting individual stocks to buy, the next step is to determine which stocks you'd like to purchase. A couple of pointers:
- Follow a "buy and hold" strategy: Only buy stocks that you want to own for many years. Don't buy a stock just because you think it will perform well over the next few weeks or months.
- Diversify your holdings: Don't put all of your money into just one or two stocks. Even if you're investing only a relatively small amount of money to start, diversify your portfolio by buying a few shares of several different stocks. With the advent of commission-free trading, owning the stocks of many different companies does not incur any additional expense.
Learn more about how to choose which stocks to buy by checking out our comprehensive guide to investing in the stock market.
3. Decide how many shares to buy
To determine how many shares you should buy, first decide how much money you want to invest in each stock that interests you and then divide this amount by the stock's current share price. You can find stock prices on your brokerage's platform by searching for either the stock's ticker symbol or the name of the company.
If your brokerage trades fractional shares, you can purchase any dollar amount of a stock regardless of its share price. Many brokerages don't buy or sell fractional shares, so in that case you'd need to round down to the nearest whole number of shares to determine how many you can buy.
As an example, let's say you want to invest $1,000 in Microsoft (MSFT 0.8%). You check Microsoft's share price and find that it's $149.50. Dividing $1,000 by this share price indicates that you can buy up to 6.7 shares. Assuming your brokerage doesn't trade fractional shares, you would purchase six shares of Microsoft stock.
4. Choose an order type
Different order types exist for stock purchases. The type of order you place to buy stock specifies the conditions under which you want your broker to transact on your behalf. Placing a "market order," which instructs your broker to buy the stock immediately and at the best available price, is typically the best order type for buy-and-hold investors.
However, you may instead want to place a "limit order," which indicates to your broker the maximum price for a stock that you're willing to pay. For example, if a stock is currently trading for $20.50 per share, and you want to buy it only when the price is less than $20, then you would place a limit order. Your broker would only transact on your behalf if the stock's price dips below $20.
5. Place the stock order with your brokerage
To place a stock order, access the appropriate section of your brokerage's platform and enter the required information. Your brokerage will typically ask for the company or stock ticker name, whether you want to buy or sell shares, and the dollar amount or how many shares you want.
After you tap the "place order" button, your stock purchase should be executed in a matter of seconds (if the order type is a market order). Your portfolio should immediately update to reflect your ownership of the newly purchased shares.
6. Build your portfolio
The final step in this process is to build out your investment portfolio. Now that you have a brokerage account and know the basics of how to buy and sell stocks, you can keep adding money to your brokerage account and investing in stocks you'd like to own for years to come.
As a final thought, while it can be tempting to monitor the performance of your stocks every day (especially at first), it's important to maintain a long-term mindset. Certainly you can and should read quarterly reports and subscribe to news alerts to stay current on each of the companies in which you hold stock. But if your stocks' prices decline somewhat, don't sell in a panic. And, if your stocks' prices rise by a few dollars, resist the urge to cash out. The best, and easiest, way to build wealth over time is to buy shares of great companies and hold them for as long as the companies remain great.
