How To Buy Stocks: A Step-by-Step Guide for Beginners

Buying stocks might seem intimidating if you’ve never done it before. But with the right online stockbroker or investment app, and a willingness to learn the fundamentals, it can be a straightforward process. Read on to learn how to buy stocks in five simple steps.

Step 1: Set Up an Account To Buy Stocks

When opening a brokerage account, you’ll need to decide whether you want a full-service broker, which offers personalized advice and services or a discount broker, which allows for self-directed trading at lower fees.

Setting up an account with an online stockbroker or robo-advisor is simple. You’ll need to provide:

• Personal information: Your name, address, date of birth and Social Security number.
• Financial information: Bank routing number and account number or debit card number.

Step 2: Researching Stocks Before You Buy

There’s no shortage of choices when it comes to buying stocks or investing in individual 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 to invest.

Pay attention to key metrics such as:

• Price-to-earnings ratio: Indicates whether a stock is overvalued or undervalued.
• Debt-to-EBITDA ratio: This shows how much debt a company has compared to its earnings.

Also look at a company’s competitive landscape, management team and how industry trends might impact its stock price.

Stock screening tools can help you narrow your options by filtering stocks based on market capitalization, performance and other factors.

Analyst reports and stock ratings can provide insights into whether a stock’s price is fair, overvalued or undervalued. Compare this with future revenue forecasts and competitor’s valuations.

Step 3: How To Buy Stocks — The Process

When purchasing stocks, you have several order types to consider:

• Market order: Buys the stock at the current market price.
• Limit order: Specifies the maximum price you’re willing to pay or the minimum price you’re willing to sell at.
• Stop order: Automatically buys or sells once the stock reaches a certain price.

Market orders are simple and execute quickly, while limit and stop orders give you more control over the price you pay or sell for.

Your budget will determine how many shares you can afford. You can also invest in fractional shares, depending on the online brokerage you choose. That can allow you to invest with less money or create a more diversified portfolio.

Step 4: Place Your First Stock Trade

You can follow these steps to place your first stock trade:

1. Log in to your brokerage account.
2. Search for the stock you want to buy. You can use the ticker symbol to do so.
3. Choose the type of order — market, limit or stop.
4. Enter the number of shares you want to purchase.
5. Review the details and confirm your order.

Keep in mind that trade execution times can vary depending on market conditions. You can check your order status to make sure it goes through as planned.

Step 5: Manage Your Stock Portfolio

You can use your brokerage platform’s tools to monitor stock performance. Look at metrics like price changes, dividend payouts and overall returns.

Next, be sure to diversify your investment portfolio. There are no “sure things” in stock investing, so a diversified portfolio is the best way to reduce your risk. Diversifying your portfolio with stocks in different industries makes it easier to ride the ups and downs should one industry get hurt by an unexpected event.

At times, you may need to sell stocks to rebalance your portfolio. Keep these tips in mind:

• Keep your target asset allocation front of mind when rebalancing your portfolio.
• Sell stocks if they no longer align with your financial goals.
• If stock fundamentals weaken, you might want to consider selling.

Types of Stocks To Consider

Here are some different types of stocks explained:

• Common stocks: Offer voting rights and potential for capital appreciation.
• Preferred stocks: Provide fixed dividends and higher claims on assets but no voting rights.
• Growth stocks: New or younger companies that are growing or serving markets with high growth potential. Though they can have high gains they are also highly volatile for short-term investments.
• Value stocks: Traded at a discount with potential for long-term gains. Think of these as buying stocks on sale, so you get a good deal on a more valuable stock that is underpriced.
• Dividend stocks: These are stocks that give shareholders some of the earnings as dividends. This means you get a steady income from your investments no matter the current market price. 

Common Mistakes To Avoid When Buying Stocks

When investing in stocks, it’s easy to make mistakes if you’re not careful. One common mistake is focusing on short-term price changes. Reacting to daily market swings can lead to impulsive decisions.

Skipping research is another mistake you should try to avoid. Without understanding a company’s financial health or market position, you risk poor investment choices.

Lastly, emotional investing can detail your strategy. You should always stay focused on your long-term plan.

Conclusion

Buying stocks used to be a complicated process that mainly catered to wealthy investors and publicly traded companies. With the rise of online brokers, stock trading is open to everyone. You can easily open an account with an online broker in about five minutes, and you can buy or sell stocks commission-free.

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 fully understand both how to place a stock trade and how the stock market as a whole operates. Stocks are best used as long-term holdings, but check your portfolio periodically to adjust for market changes.

Vance Cariaga, Elizabeth Constantineau, John Csiszar and Dawn Allcot contributed to the reporting for this article.