How To Buy Stocks in 4 Easy Steps
Buying stocks might seem intimidating if you’ve never done it before, but in truth, it can be as easy as ordering a new pair of shoes from Amazon. The hardest part comes in doing your research so you understand some basic principles.
If you’re ready to take the plunge, you can start buying stocks online in no time at all. But first, you’ll need a brokerage account. Keep reading to learn how to set one up, and what else you need to do to start buying stocks online.
1. Choose an Online Stockbroker
The steps to opening an account with an online stockbroker are pretty much the same as with a full-service brokerage firm. You’ll need to provide personal and financial information, including your name and address, date of birth and Social Security number. You’ll also need to provide funding information, such as your bank routing number and account number or debit card number.
Here’s a look at five established online brokers, some of which are included in GOBankingRates’ 10 Best Online Brokerages With Strong Trading Capabilities.
|Fidelity||Stock: $0; Mutual Fund: $0-$49.95|
|Charles Schwab||Stock: $0; Mutual Fund: $0-$74.95|
|TD Ameritrade||Stock: $0; Mutual Fund: $0-$74.95|
|E-Trade||Stock: $0, Mutual Fund: $0-$49.99|
|Merrill Edge||Stock: $0; Mutual Fund: $0-$29.95|
Fidelity offers low fees compared to many other brokers and doesn’t charge anything for transferring out your account or having insufficient funds. The firm also recently joined the ranks of discount brokers by offering $0 standard equity trades. You can open a Fidelity account online or by calling customer service at 800-343-3548.
Like Fidelity, Charles Schwab charges $0 per online stock trade. It also offers hundreds of commission-free exchange-traded funds as well as a robo-advising platform, known as Schwab Intelligent Portfolios, that has no advisory fees, commissions or service fees, though there is a $5,000 minimum. You can get started at the Charles Schwab website or by calling 866-232-9890.
In addition to charging $0 to buy stocks, TD Ameritrade has no account or trade minimums. Customers can choose from multiple trading platforms based on their level of experience. TD Ameritrade is also one of the few online brokers that provides access to cryptocurrency trading. You can start the process of opening an account on the TD Ameritrade site or by calling 800-454-9272.
E-Trade, one of the pioneers of internet banking, charges $0 per online trade. The firm requires $500 to open a Core Portfolios automated investing account, but there’s no minimum for brokerage accounts, and equity trades are free. You can either call 800-387-2331 or visit the E-Trade website to open an account.
Merrill Edge is the online brokerage side of venerable Merrill Lynch, which is now a Bank of America company. The firm offers $0 online trades and a highly regarded robo-advisor. To open an account, visit the Merrill Edge website or call 888-637-3343.
2. Decide Which Type of Stock You Want To Buy
There’s no shortage of choices when it comes to buying stocks. The number of options can be downright overwhelming. That’s why it’s important to understand your risk tolerance, investment objectives and available funds before you begin buying stocks online.
For example, if you want to invest in a few different stocks for diversification purposes but don’t have a lot of money to spend, you want to avoid the most expensive stocks. This year, that list includes well-known names like Amazon, which is trading at about $2,914.30 as of April 25, 2022, and Chipotle Mexican Grill, which is also currently trading at about $1,507.55.
Warren Buffett’s Investment Style
Warren Buffett, the billionaire investor known as the “Oracle of Omaha,” uses the concept of moats to describe his investment style. According to Buffett, the type of company he wants to own is one with an established competitive advantage over others that is difficult to overcome, just like a wide and deep moat makes it hard for attackers – in this case, business competitors — to cross. For example, Buffett has long maintained a position in Coca-Cola because while there are certainly plenty of competitors in the beverage industry, Coca-Cola itself is hard to duplicate or surpass.
Understanding P/E Ratio and Debt-To-EBITDA Ratio
An important step in the process is researching stocks you might be interested in and educating yourself on important metrics such as price-to-earnings ratio and debt-to-EBITDA ratio.
Pay particular attention to finding information about a company’s competitive landscape and management team, as well as how industry trends might impact its stock price. One of the most famous investment axioms on Wall Street, attributed to famed money manager Peter Lynch, is that you should only invest in what you know.
Doing Your Due Diligence
If you’re researching stocks on your own, consult analyst reports, industry trend bulletins, company prospectuses and company annual reports and conference call transcripts. All of this data can help you get a handle on how a company is performing and where it might be headed next.
Analyst reports in particular can help teach you if a company’s current share price is fair, overvalued or undervalued. These determinations are made by comparing a company’s stock price to items like its earnings, future revenue forecasts and competitor valuations.
As a general rule, your best chance at making money in the stock market is by owning companies with consistent earnings and revenue growth. If a company can outperform the expectations of Wall Street analysts, its stock will typically go up.
3. Think About How Many Shares To Buy
Again, much of this depends on how much money you have to invest. If you want to start with $2,000, for example, you can forget about buying whole shares of Amazon. In this case, research the best affordable stocks out there.
These might include established brands like CVS Health and Tyson Foods, which produce steady profits and rank as leaders in their respective industries. CVS stock is priced at about $101.92 a share as of April 25, 2022, while Tyson’s is priced at about $94.83. With $2,000, you could afford to purchase about 10 shares of each stock.
Bear in mind, though, that some firms are now offering investors access to fractional shares of stock. SoFi, for example, is an online bank and brokerage company that allows investors to buy partial shares of some of the most well-known firms in the U.S., including Amazon. With $2,000 to invest via SoFi, you could pick up about 0.65 shares of Amazon.
If you’re a beginner, it’s advisable to start small when it comes to buying your first stocks. If you rush in too quickly, you might end up losing money before you even know what you’re doing.
Next, be sure to diversify your investment portfolio. Even if you’re sure you’ve found the next big thing, you don’t want to toss all your eggs in one basket. Diversifying your portfolio with different stocks in different industries makes it easier to ride the ups and downs should one industry get hurt by an unexpected event. This makes it especially important to find affordable stocks so you can buy shares in a few different companies.
4. Make Your Order
When you buy your first stock, you’re likely to put in a market order, which is the most common type. With a market order, you’ll buy the stock at whatever the current price is.
Another option is a limit order, which designates a price you’re not willing to exceed. For example, if you want to buy Apple stock at $160 per share but it’s currently trading at $165, you can put in a limit order at $160. Your order won’t be executed unless the share price trades down to $160.
Whether you’re entering a market order or a limit order, be sure to do the math so that you can afford to pay for your purchase. For example, if you want to buy 100 shares of Apple at $160 per share, you’ll have to pay at least $16,000. If your broker charges commissions or other fees, you’ll need to incorporate those into your total purchase price.
If you place a market order, you can’t guarantee what price you’ll receive. If the market is running red hot, those Apple shares might hit $165 by the time your order is executed, meaning you’ll have to pony up at least $16,500 for your 100-share order.
Another thing to keep in mind is that buying stock online is not the type of investment where you can just set it and forget it. Although stocks are best used as long-term holdings, you should still check in regularly to find out if any market or financial events might make you consider selling them. Take the time to fully understand both how to place a stock trade and how the stock market as a whole operates.
Glossary of Terms for Buying and Selling Stocks
As you get familiar with how to buy and sell stocks online, here are a few basic investment terms you should understand:
|Buying and Selling Stocks: A Glossary of Terms|
|Annual Report||A yearly summary of a company’s economic performance.|
|Ask||The lowest price at which you are willing to buy a stock.|
|Bid||The highest price at which you are willing to sell a stock.|
|Close||The last trading price of a stock at the end of the market day.|
|Dividend||A payout to shareholders, usually in cash and typically made quarterly.|
|Spread||The difference between the bid and the asking price.|
|Stop Order||An order to buy or sell once an indicated stop price is reached.|
|Limit Order||A stock order that isn’t executed until the limit price is reached.|
|Stock Chart||A graphical representation of the movements of a stock price.|
|Trading Volume||The number of shares that a stock trades on a particular day.|
|Commission||The fee or charge that a broker assesses for executing a trade.|
How Can a Beginner Start Buying Stocks?
Buying stocks used to be a complicated process that mainly catered to wealthy investors. With the rise in online brokers, stock trading is open to everyone. Even with only $1,000 or less to invest, you can open an account with a broker in about five minutes online, and you can buy or sell stocks for minuscule commissions.
At the same time, just because the door to investing is wide open doesn’t mean you should dive in without doing your homework first. Take the time to research how stocks work, what it will cost you to buy and sell them, and which online brokers are best suited for your trading needs before you put your money into the stock market.
Vance Cariaga contributed to the reporting for this article.
Information is accurate as of April 25, 2022.
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