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How to Buy Stocks
By Cassidy Horton MONEY RESEARCH COLLECTIVE
Stocks are a great investment if you buy wisely. However, investing in stocks can be intimidating for beginners. In this guide, we’ll cover what you need to know before investing in the stock market, including what stocks are, how they work and how to buy them.
Table of contents
- A beginner’s guide to stocks
- How to buy stocks through an online broker
- Alternative ways to buy stock
- Are individual stocks or mutual funds better?
- Start investing in the stock market
A beginner’s guide to stocks
Before discussing how to buy stocks, let’s look at the basics. A stock is an individual share of a company. Purchasing a stock means buying a portion of the company you’re investing in — usually a very small part. The cost of stocks fluctuates depending on economic and financial factors. If the price increases after you buy them, you can sell your stocks to earn a profit.
Whether you’re looking to invest in individual stocks or mutual funds, the guide below will give you the knowledge you need to get started.
Why buy stocks?
Buying stocks is one of the main methods strategic investors use to grow their wealth. The benefits of buying stocks include steady growth in value, flexibility and regular payouts.
Steady long-term growth
Stocks represent ownership of shares in real businesses that generate revenue and profits. As these businesses grow, the value of their shares also grows. Stock in a well-established company often grows steadily since it’s unlikely the company will go bankrupt.
Over the long term, many stocks deliver steady value growth. For example, Apple’s stock has risen over 540% in the last ten years and even more since the company first went public in 1980. Of course, every stock you invest in won’t have Apple’s outstanding growth. Some may even experience declines. Stocks are unpredictable, but if you do your research, you can aim to invest in stocks that are expected to increase their value. Keep in mind, though, that many factors affect growth, and it can change at any time — it may not go as you expect (more on this below).
Greater flexibility than other investment types
Stocks are much more liquid than other investments, such as real estate. This means you can easily buy and sell stocks. This flexibility makes it easy to adjust your investment strategy as your financial goals and market conditions change.
Investing in a range of stocks from different industries — even from different countries — can decrease your risk of losing money since you’ll avoid having all your investment tied up in a single company.
You have various options when buying stocks, including individual stocks, exchange-traded funds (ETFs) and mutual funds. You can select the investment option that best fits your objectives and risk tolerance.
- Individual Stocks: If you invest in individual stocks, you can pick companies you think have much growth potential. Investing in individual stocks gives you more control over the companies you invest in, but it’s also a riskier choice for beginners than ETFs or mutual funds.
- Exchange-Traded Funds (ETFs): ETFs let you invest in predefined collections of stocks chosen by experts. For example, the S&P 500 is a collection of the top 500 publicly-traded companies in the U.S. If most companies in an ETF grow, so does your investment. Because ETFs are already diversified (they include stock from multiple companies and industries), investing in ETFs carries fewer risks than investing in individual stocks. You can buy full or fractional shares in an ETF anytime while the stock exchange is open. The price of ETF shares fluctuates with the market.
- Mutual Funds: Like ETFs, mutual funds let you invest in a collection of stocks. Fund managers actively monitor mutual funds and decide which companies to invest in. As a result, mutual funds generally involve higher fees than ETFs. Orders to invest in a given mutual fund are executed only once a day, so everyone gets the same price. However, there are usually minimum dollar amounts required to invest in mutual funds, so this may not be the most accessible option for everyone.
Regular dividend payouts
Many stocks pay dividends, which are regular payments made to shareholders through cash or additional shares. Dividends are paid out of a company’s earnings — quarterly or annually — which can represent financial strength and stability. Some companies have a long history of increasing their dividends yearly, making them attractive options for investors.
Dividends can provide a cushion against market volatility because they represent a return on investment that is not tied to share price fluctuations.
The dangers of investing in stocks
Investing in the stock market can be a great way to build wealth over time, but it’s essential to understand the risks involved. While stocks offer the potential for long-term growth, they also come with the potential for loss.
No guarantee of profits
The stock market can be volatile. The value of your investments can fluctuate based on a wide range of factors, including economic conditions, geopolitical events and changes in consumer behavior. Additionally, inflation affects the stock market.
Even if you invest in a company with a solid track record of growth and profitability, there is no guarantee that its stock price will continue to rise. In fact, some companies that were once considered great investments have since gone bankrupt.
As a beginner investor, you should research each investment opportunity carefully. Make sure to assess the risk involved. Not doing enough research is one of the most common mistakes investors make.
The potential to lose money
Stock values always have the potential to decrease, sometimes for years at a time. There is also the possibility that a company you’ve invested in goes bankrupt, causing you to lose your investment. If your stocks are down, don’t panic. Instead, learn how to manage stock market volatility.
How to buy stocks through an online broker
An online broker is a digital platform that allows you to buy and sell stocks and other securities. Before the internet, people had to connect with brokers and trade stocks over the phone. Today, online brokers give investors more access to the market.
Online brokers charge various fees. Depending on the broker, some fees might include stock trade fees (per share or transaction), broker-assisted trade fees, mutual fund fees and options trading fees.
Here are five steps to buying stocks through an online broker:
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Set up a brokerage account
Research several brokers’ fees and features before choosing which to use. Once you decide, visit your broker’s website and set up an account according to its directions. You’ll need to provide personal information such as your name, address, Social Security number and employment information.
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Research stocks that you’re interested in
Once you set up your brokerage account, it’s time to research stocks to buy. Use the resources your online broker provides or do your own research, such as reading shareholder reports and other annual reports.
If a company you invest in does well financially, your investment will grow alongside it. When researching stocks, consider factors such as a company’s financial health, growth potential and competition within their industry. Look for indicators that suggest it has a strong future ahead of it. You should consider a company’s long-term growth and stability even if you only want to make a short-term investment.
You can start by researching companies in your own field since you’re already familiar with how those companies operate within their market. As you feel more confident choosing stocks, branch out to other industries. Stay informed about investing tips to earn the most with what you have.
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Choose how many shares of stock you want to buy
How many shares you buy should depend on your investment strategy, risk tolerance and available funds. Remember that all stocks involve risk. As a beginner investor, you should only invest what you can afford to lose.
There are two main ways you can buy stock. The first option is to invest the full amount you want to spend at once. For example, if you want to invest a total of $5,000, you can buy $5,000 worth of stocks in a single day. This is the simplest way to buy stocks, but it can also be risky because the stock market can be unpredictable. Investing a large amount all at once can expose you to losses if the market goes down.
The other option is to invest on a schedule — invest a smaller amount of money monthly or weekly. With this strategy, you can keep investing when stocks are down. Still, this method reduces your risk since you don’t have to worry about investing all your savings at the wrong time.
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Decide how you want to order
An “order” is a request you make to your broker to buy or sell stocks. Online brokers offer two main types of orders: market orders and limit orders.
Market order
A market order is the simplest and most common type of order. When you place a market order, you instruct your broker to buy or sell a stock at the best available price at the time. The price you pay depends on the current market conditions.
One advantage of a market order is that it’s executed immediately, which can be useful when you need to buy or sell stocks quickly. However, stock prices may change after the order is executed. As a result, you may end up paying more or receiving less return on your investment than if you waited for more favorable market conditions.
Limit order
A limit order lets you buy or sell stock when it reaches your desired price. Your broker will only execute the order if the stock reaches (or is even better than) the price you specified.
You get more control over the price you pay for stocks and the return you’ll receive. However, it’s possible that your broker may never execute your limit order if the stock doesn’t reach your specified price.
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Place your order and monitor your new investment
After your broker executes your order, you must monitor your investment regularly to ensure the company’s performance meets your expectations. For long-term investments, it’s better to stay consistent with your investing schedule, regardless of how stock prices fluctuate. Still, if you learn concerning news that may affect your investments, you can try to sell your stock quickly. Monitoring will help you decide the best time to sell for short- and medium-term investments.
Alternative ways to buy stock
While buying individual stocks through an online broker is the most common way to invest, alternative methods may be more suitable for some people.
Direct Stock Purchase Plan (DSPP): A DSPP is a program some companies offer that allows investors to purchase stocks directly from the company. This can be a cost-effective way to invest in a specific company, as there is no stock broker — and therefore no brokerage fees — involved.
Retirement accounts: Another popular way to purchase stocks is through retirement accounts such as 401(k)s and individual retirement accounts (IRAs). Many employers offer retirement accounts for their employees, or you can open one yourself. Through a retirement account, you invest a portion of your monthly paycheck into various stocks and assets. Some accounts, like self-directed or brokerage IRAs, let you decide which stocks to invest in. With other accounts, such as 401(k)s, your employer may decide. Retirement accounts often come with tax benefits, such as tax-free contributions and gains until you reach retirement age.
Remember that these accounts are a long-term investment to use in your retirement. They are not the best option for accessing money quickly.
Crowdfunding: Crowdfunding is a method of raising capital in which a start-up company asks for investments from a large number of people. In this case, the company is responsible for the crowdfunding campaign and directly seeks out potential investors. In exchange for your investment, you get shares in the company.
Most crowdfunding takes place on online platforms. If you’re considering this method, research which crowdfunding platforms offer stock investments, then invest through the platform. If the company achieves its funding goals, you will then own shares.
Are individual stocks or mutual funds better?
Both individual stocks and mutual funds have their pros and cons. The decision about where to invest ultimately depends on your investment goals, risk tolerance and personal preferences.
Individual stocks offer the potential for higher returns since they are tied directly to a company’s performance. If a company performs well, the stock price can increase significantly. Additionally, investing in individual stocks provides greater control over the stocks you purchase and the timing of your trades.
However, individual stocks are riskier. If the company you invest in performs poorly, your investment can suffer much more than it would with a mutual fund. Investing in individual stocks also requires a lot of research and knowledge to make informed investment decisions, which can be time-consuming and challenging for beginner investors.
On the other hand, mutual funds offer a more diversified investment approach by investing in a portfolio of stocks, bonds or other assets. This diversification can help spread out the risk and reduce the impact of any one stock underperforming. Mutual funds are generally managed by professional fund managers who choose investments and monitor their performance. So you don’t need to do much research yourself into individual companies or the state of the markets.
However, investing in mutual funds can also come with large fees, and the fund manager’s investment decisions may not always align with your personal investment goals or values. With a mutual fund, you will have less control over your investment than when buying individual stocks.
Start investing in the stock market
Investing in the stock market can be a great way to grow your wealth over the long term, but it’s important to approach it with a clear understanding of the risks involved. With the right approach and a commitment to learning, you can start investing in the stock market and work towards your financial goals.
Cassidy Horton is a finance writer based in Seattle, Washington. With an MBA and a bachelor's in public relations, her work has been published over a thousand times by The Balance, Finder.com, Money Under 30, Clever Girl Finance, and many more. Cassidy is a self-confessed money nerd who’s passionate about helping people find financial freedom. Oh, and she really loves cats.