Investing in stocks for the first time is a difficult task. This can be scary because real money is at risk of being lost.
However, stocks are a path to wealth because they represent ownership of the company and the right to future profits and earnings. An investor buys shares now, hoping that they will be worth more later.
Some investors buy stocks to create a growing passive income stream or dividend growth strategy. The idea is simple and it works, and there are many real stories of people who got rich in stocks.
Then the question arises, how to buy shares for beginners? What steps are important to know?
What follows is a step-by-step guide that answers these questions and puts you on the path to wealth.
You probably already own shares
Most employees probably own stock indirectly through their company’s retirement plan, whether it’s a pension or a 401(k).
For example, a 401(k) plan will provide employees with a variety of options for investing in mutual funds. The funds are managed by an asset manager such as Vanguard or Fidelity and the fund manager selects the stocks.
The worker selects the funds in the plan, but not the shares. It’s simple, but the employee doesn’t buy the shares directly.
However, some investors may want to own shares outright.
A beginner must first understand the basics of stocks. A share is also known as a share and represents the percentage of ownership of a company. For example, if you own ten shares of a company with a total of 100,000,000 shares, you own 0.00001% of the company.
Shares of public companies are traded on exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq, two of the most famous in the US. Small investors usually do not buy or sell shares of a company. Instead, they buy and sell shares on the stock exchange through a brokerage firm.
Other factors when buying shares include the type of order, the dollar amount, and most importantly, the shares you want to buy.
Stocks are not risk free. Most people are familiar with low-risk savings accounts and certificates of deposit (CDs), which are in many cases insured by the Federal Deposit Insurance Corporation (FDIC).
On the other hand, stocks carry more risk and investors can lose money because stock prices could drop during a correction or bear market. For example, in 2022, the stock market as a whole fell by more than (-10%). This decline is considered a market correction.
However, some trending growth stocks have fallen even further. For example, Netflix (NFLX) is down about (-67%) year-to-date.
In addition, public companies can perform poorly and declare bankruptcy, effectively destroying shareholders. Hence, a beginner should focus on safer stocks and diversification.
Putting all your money into one high-risk stock exposes the principal to loss.
Assuming you have a good understanding of stocks and risk, newbies asking how to buy stocks should start by choosing a brokerage firm.
Steps on How to Buy Stocks for Beginners
Choose a brokerage firm
Start buying stocks by choosing a brokerage firm.
In the past, an investor had to deal with a broker who placed an order to buy or sell. Today, orders are placed directly by the investor online. Therefore, a person should start the process by choosing an online broker and creating an account.
Open an account online
Opening an account online is easy and simple. First, the person must fill out an application, provide the required identification information, and wait for approval.
Finally, the investor needs to add money to the account by directly linking a bank account and transferring the funds or mailing a check.
Full Service Brokers, Discount Brokers and Investor Robots
The process is roughly the same for almost every online broker. However, there are many online broker options; they are categorized as full-service brokers or discount brokers.
Full-service brokers offer a wide range of services beyond the ability to buy or sell stocks or exchange-traded funds (ETFs).
They provide financial planning, insurance, retirement accounts, and other financial services. They often have online brokerage accounts, but fees tend to be higher.
Some full-service brokers have a minimum account size. A full-service broker may be the best choice if you need more options and advice, as long as you can afford the commission.
Today, the most common type of firm is the online discount broker.
Investors will place their buy and sell orders using the online platform. In addition, they often offer educational information and limited research tools for do-it-yourself (DIY) investors.
However, many third party subscription newsletters and research sites are available online to help investors.
Discount brokers often have online applications, no minimum deposit, and commission-free stock and ETF trading.
A relatively new way to buy and sell shares is through an online robo-advisor.
These platforms use technology and algorithms to make decisions about buying and selling stocks and ETFs. Robo-advisers are more automated and generally have lower costs than full-service brokers, but cost more than discount brokers.
Rating of brokerage firms
Below is a partial list of brokerage firms ranked by number of accounts.
- Charles Schwab
- Robin Hood
- TD Ameritrade
- Electronic commerce
- Ally Invest
- Merrill Lynch
Other brokerage firms and robo-advisers include Interactive Brokers, M1 Finance, Wealthfront, Betterment, Personal Capital, TradeStation, JP Morgan, SoFi Invest, and more.
The next step for the independent investor is stock research.
Read about promotions in books
Start researching stocks by reading about it in one of the many investing books available to the public that teach you how to research and choose stocks.
The gold standard among books on investing for beginners is one of three books by Peter Lynch. He trains people to choose stocks, to choose from different stocks, when to buy stocks and when to sell stocks.
I have read all three books:
- One up on Wall Street
- beating the street
- Learn to earn
Focus on what you know, not popular trends, and avoid distractions.
Research promotions in online newsletters
You can also research promotions by signing up for newsletters or services like Morningstar or Seeking Alpha.
The newsletters are usually published on a monthly basis and provide several choices depending on the coverage of their stocks. Morningstar is a large well-known service providing stock analysis and other services. These include wide-moat stocks and undervalued stocks.
Seeking Alpha is another great service that provides crowdsourced stock analysis. These services are suitable for beginners who are asking how to buy stocks because they provide structure and information for new investors.
Stock Screening Platforms
You may also want to consider using a stock verification platform. Companies like Morningstar and Seeking Alpha offer stock verification. Some online apps offer a special stock view.
They often have hundreds of fundamental and calculated indicators, charts, tables, watchlists, and so on. A self-taught investor can take as much time as necessary to narrow down the extensive list of stocks to a few.
Amount to invest
The next step is to determine the amount of investment.
If you have a lump sum, it makes sense (and reduces risk) not to invest everything in one trade.
Lump sum investors often follow the dollar cost averaging method.
Dollar cost averaging means that investors buy a fixed dollar amount of stock at regular intervals instead of trying to time the market and invest a significant amount all at once.
For example, let’s say you want to invest $5,000. Instead of buying $5,000 worth of stock at a time, you can invest $250 or $500 a month every month for a long period of time. This method tends to reduce risk and the average cost per share.
Instead, let’s say you only have about $50 a month to invest after monthly expenses. You can then still follow the dollar cost averaging strategy, but with a smaller dollar amount.
In any case, a prudent investor does not invest all his money in one stock. Instead, it’s better to diversify a few stocks and increase the number over time.
Putting all your money in one stock exposes you to the risks associated with individual stocks. Diversification helps reduce this risk.
Select order type
The last step is to select the order type. The two main types of orders are the market order and the limit order. There are more order types, but beginners will mostly use these two.
A market order buys or sells a stock immediately at the best available price, while a limit order buys or sells a stock at a specific price.
For example, if you want to buy Coca-Cola (KO) at $62.49 per share and the current price is above that, you won’t buy the shares until the share price drops.
If the share price does not decrease, the order expires. A limit order gives you more control over the price you pay for a stock.
An order can be valid for a day (GFD), valid until canceled (GTC) or after the expiration of the order, which is usually 60 days.
The basics are simple for beginners trying to figure out how to buy stocks.
One caveat is that many investors spend too much time reviewing their portfolios after buying their first shares. However, if you have an investment strategy and follow it, you only need to periodically monitor your stock portfolio.
Keep your goals and why you buy stocks in the first place in mind when investing and buying stocks.
There is always something to learn. Investing in stocks is a lifelong learning process as the market and technology are constantly changing.
Denial of responsibility: The author is not a licensed or registered investment advisor or broker/dealer. It does not give you individual investment advice. Please consult a licensed investment professional before investing your money.
This post originally appeared on amateur.