How to Buy Stocks: A Step-by-Step Guide for Beginners
Updated January 24, 2024 at 1:30 pm
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Think about the companies you love and the products you use regularly. What if you could own a small portion of those companies? When you buy stocks, that’s exactly what you’re doing. Plus, investing in the stock market is a great way to increase your returns and grow real wealth over time.
Thanks to the many brokers offering fractional investing and zero-commission trading, you can invest in stocks even if you don’t have a lot of money. But it’s helpful to know where to buy stocks and how to invest in the stock market before you begin.
Vault’s Viewpoint on Buying Stocks
- Investing in stocks can help you diversify your income and outpace inflation.
- You can get started investing without a lot of money.
- Online brokerage platforms make picking your stocks and growing your portfolio easy.
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Benefits of Investing in Stocks
Here are the five biggest reasons you should consider investing in the stock market:
- Start small: Thanks to the increase in online brokerage tools, you can invest in stocks without a lot of money.
- Chance to earn higher returns: Most people buy stocks because the returns are significantly higher than what you’d receive by putting money away in a savings account or investing in a certificate of deposit (CD). The stock market has its ups and downs, but the S&P 500 has returned between 8% and 12% annually.
- Outpace inflation: Investing in stocks for the long term can lead to returns that outpace inflation.
- Earn passive income: If you invest in a company that pays dividends, like IBM or Caterpillar, you’ll receive quarterly payments which can help supplement your income.
- Diversify your income: When you invest in multiple companies across different sectors, you can help reduce the risk and volatility of your investment portfolio.
How to Buy Stocks
If you’re ready to start setting money aside for long-term investments, here are six steps you’ll take to get started buying stocks.
Open a Brokerage Account
Before you can purchase stocks, you need to open a brokerage account. Many of the best online brokers provide commission-free trading and don’t require a minimum balance to open an account.
As you’re researching different brokers, consider the different features offered and how user-friendly the platform is. New investors will probably want to choose an online broker that caters to beginners, like Robinhood or E-Trade.
Once you’ve selected the company you want, you’ll have to complete a new account application. Online brokers will need the following information to comply with federal regulations:
- Name
- Social Security Number
- Date of birth
- Address
- Phone number
- Driver’s license or passport
- Occupation
- Whether you’re employed by a brokerage firm
- Yearly income
- Net worth
- Level of risk you’re comfortable with
Once the account is open, you can fund it by making a transfer from your checking or savings account. From there, you’re ready to choose which stocks you’ll invest in.
Choose Your Stocks
Once you’ve funded your brokerage account, it’s time to pick which stocks you want to buy. If you aren’t sure, you may want to spend some time researching different companies first.
Make a list of potential companies you want to invest in and check out their annual reports, SEC filings and quarterly earnings updates. This information will help you evaluate the financial strength of different businesses.
Once you purchase your stocks, it’s best to follow a buy-and-hold strategy, which means you only purchase stocks you plan to keep for the long haul.
“If you choose to buy stocks, it’s best to adopt a buy-and-hold strategy to buy wealth over time. This strategy helps you avoid selling based on emotion and prevents you from missing out on the market’s best days.”
— Jamie Johnson
Decide How Many Shares You Want
Next, you need to decide how much money you’re willing to invest. From there, you can divide that number by the price of the stock. For example, let’s say you want to invest $1,000 into Amazon.
You’ll divide that number by the current price of the stock which will tell you how many shares you can afford. If your online brokerage offers fractional shares, you can purchase portions of stocks, which is especially helpful if you don’t have enough money to purchase a full share.
Choose Your Order Type
There are two order types every investor needs to know about: market orders and limit orders. A market order is the most basic trade since it buys the stock immediately at the best price available.
But the last-traded price is not necessarily the price you’ll pay for the stock. The market moves quickly so your order will usually be slightly different than the quote you received. That means you could end up paying more or less money than you were planning on.
A limit order is an order to buy a stock at a specific price or lower. A limit order isn’t guaranteed since the order can’t be placed if the price exceeds the amount you specified. But limit orders are a good way to ensure you don’t spend beyond a certain price.
Place Your Order
To place an order, you’ll log into your brokerage account and select the account you want to trade in. Then you’ll choose the ticker symbol, which is a short combination of letters or numbers representing that company on the stock exchange. For example, Amazon is listed on the NASDAQ, and its ticker symbol is AMZN.
From there, you’ll select “buy” and enter either the dollar amount you want to spend or the number of shares you want to purchase. Once you submit your order, it will typically be executed quickly and you’ll be notified of your stock ownership.
Start Building Your Portfolio
Now that you understand how the process works, you can build your portfolio. Continue to add money to your brokerage account and decide if you want to purchase more stock in companies you already invest in or invest in new companies.
Don’t make the mistake of monitoring your portfolio too closely or panicking as soon as you hit a rough patch. Knowing when to sell stocks is just as important as picking the right stocks to invest in. Every investor experiences ups and downs and it’s important to maintain a long-term mindset. And it’s smart to diversify your portfolio by investing in other assets, like mutual funds or a retirement account.
Online Brokers vs. Full-Service Brokerages
Many new investors wonder whether they should use an online broker or full-service brokerage. With an online broker, you typically pick your own stocks and manage your portfolio on your own or with the help of a robo-advisor. In comparison, a full-service brokerage employs professional advisors who track and manage your portfolio for you.
The following table outlines the biggest differences between the two:
| Online broker | Full-service brokerage | |
| Services | Mostly self-directed brokerage accounts. | Trade execution, personalized financial advice and resources and ongoing portfolio management. |
| Cost | Typically comes with commission-free trading, low fees and no account minimums. | You can expect to pay between 1% and 2% annually for the total assets being managed. |
| Financial advice | Some online brokers provide market insights and online resources. | You’ll work with an experienced broker who will provide personalized financial advice. |
| Best for | New investors without a lot of capital to invest or investors who are comfortable managing their portfolio on their own. | High net worth individuals or investors with complex financial situations. |
Frequently Asked Questions
Can I Buy Stocks With $100?
Yes, it’s possible to purchase shares in a company with only $100. Many online investment accounts have $0 account minimums and commission-free trading, making it easier for you to put as much money as possible toward investment goals. You can even purchase fractional shares of stocks, which allows you to buy portions of a stock.
How Much Should a Beginner Put in Stocks?
Some online brokerages make it possible to get started investing with as little as $5. The exact amount you invest will depend on your risk tolerance and financial situation.
What Are Some Cheap Stocks To Buy?
It’s not a good idea to invest in stocks solely based on the price since the price doesn’t tell you anything about the company. Instead, start by researching different companies and selecting a few that you want to be a long-term investor in. From there, you can figure out how much money you have to invest.
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