Investing in stocks for the first time is a daunting task. It can be scary because real money is at risk of loss.
However, equities are the path to building wealth because they represent ownership of a company and a claim on future profits and earnings. An investor buys stock now, hoping that it is worth more later.
Some investors buy stocks to create a growing passive income stream, or a dividend growth strategy. The idea is simple and works, and many real-life stories exist of people building wealth from equities.
The question then is how to buy stocks for beginners. What steps are essential to know?
What follows is a step-by-step guide that answers those questions and put you on a path to building wealth.
You Probably Already Own Stocks
Most workers probably own stocks indirectly through their company’s retirement plan, whether a pension or 401(k).
For example, a 401(k) plan will provide employees with various mutual fund investment choices. The funds are managed by an asset manager, like Vanguard or Fidelity, and the fund manager picks the stocks.
The worker picks the funds in the plan but not the stocks. It’s simple but the employee is not directly buying stocks.
Some investors may, however, want to own stocks directly.
Basics of Stocks
A beginner must first understand the basics of stocks. A stock is also known as a share and represents the percentage ownership of a company. For example, if you own ten shares of a company with 100,000,000 total shares, you own 0.00001% of the company.
Public companies stocks trade on exchanges, like the New York Stock Exchange (NYSE) or Nasdaq, the two most prominent in the US. Small investors do not usually buy and sell shares from the company. Instead, they buy and sell stocks on an exchange through a brokerage firm.
Other factors in buying stocks include the type of order, dollar amount, and, most importantly, the stock you want to buy.
Risks for Stocks
Stocks are not risk-free. Most people are familiar with low-risk savings accounts and Certificates of Deposit (CDs) that are, in many cases, insured by the Federal Deposit Insurance Corporation (FDIC).
On the other hand, stocks have more risk and investors can lose money because stock prices may decline during a correction or a bear market. For example, in 2022 the broader stock market was down more than (-10%). This decline is considered a market correction.
However, some trendy growth stocks are down even more. For example, Netflix (NFLX) has declined by about (-67%) year-to-date.
In addition, public companies can perform poorly and declare bankruptcy, effectively wiping out shareholders. Hence, a beginner should focus on safer stocks and diversification.
Putting all your money in one high-risk stock places the principal at risk for loss.
Assuming you have educated yourself about stocks and the risks, beginners asking how to buy stocks should start by selecting a brokerage firm.
5 Steps on How to Buy Stocks for Beginners
1 – Pick A Brokerage Firm
Start buying stocks by picking a brokerage firm.
In the past, an investor had to deal with a broker who placed a buy or sell order. Today, orders are placed directly by the investor online. Therefore, a person should start the process by selecting an online broker and creating an account.
2 – Open An Online Account
Opening an online account is simple and easy. First, a person must complete the application, provide the necessary identity information, and wait for approval.
Lastly, an investor needs to add money to the account by directly linking a bank account and transferring funds or mailing a check.
Full-Service Brokers vs Discount Brokers vs Robo Investors
The process is about the same for almost every online broker. However, many choices for an online broker exist; they are categorized as either full-service or discount brokers.
Full-service brokers offer a wide range of services besides 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 the fees tend to be higher.
Some full-service brokers have minimum account sizes. A full-service broker may be the best choice if you want more options and advice, assuming you can afford the fees.
Today, the most common type of firm is an online discount broker.
Investors will place their buy-and-sell orders using an 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 apps, no minimum deposits, and commission-free trading for stocks and ETFs.
A relatively newer way of buying and selling stocks is through an online Robo-advisor.
These platforms use technology and algorithms to make decisions about buying and selling stocks and ETFs. Robo-advisors are more automated and generally have lower expenses than full-service brokers but are more expensive than discount brokers.
Ranking of Brokerage Firms
Below is a partial list of brokerage firms rank-ordered by the number of accounts.
- Charles Schwab
- TD Ameritrade
- Ally Invest
- Merrill Lynch
Other brokerage firms and Robo-advisors include Interactive Brokers, M1 Finance, Wealthfront, Betterment, Personal Capital, TradeStation, J.P. Morgan, SoFi Invest, etc.
3 – Do Your Due Diligence
For a DIY investor, the next step is to research a stock.
Read about Stocks in Books
Start researching a stock by reading about it in one of the many investing books available to the public regarding learning how to research and select stocks.
A gold standard amongst beginner investing books is one of the three Peter Lynch books. He educates people on picking stocks, choosing from different stocks, when to buy stocks, and when to sell stocks.
Read all three books:
- One Up on Wall Street
- Beating the Street
- Learn to Earn
The primary focus is to stick with what you know instead of popular trends and avoid distractions.
Research Stocks in Online Newsletters
You can also research stocks by subscribing to newsletters or a service like Morningstar or Seeking Alpha.
Newsletters are typically published monthly and provide several picks based on their stock coverage. Morningstar is a sizeable well-known service that provides stock analysis and other services. They include wide-moat stocks and undervalued stocks.
Seeking Alpha is another excellent service providing crowd-sourced stock analyses. These services are suitable for beginners asking how to buy stocks because they provide structure and input to new investors.
Stock Screening Platforms
You may also want to consider a stock screener platform. Companies like Morningstar and Seeking Alpha offer stock screening. Some online apps offer dedicated stock screening.
They often have hundreds of fundamental and calculated metrics, charts, tables, watchlists, etc. A DIY investor can spend as much time as needed to narrow down an extensive list of stocks to a few.
4 – Decide How Much To Invest
The next step is to decide on an amount to invest.
If you have a lump sum, it makes sense (and reduces risk) by not investing it all in one trade.
Investors with a lump sum often follow a dollar-cost averaging method.
Dollar-cost averaging means investors buy a fixed dollar amount of shares at regularly timed intervals instead of trying to time the market and invest a significant amount all at once.
For example, suppose you want to invest $5,000. Instead of buying $5,000 of shares at one time, you can invest $250 or $500 per month every month over an extended period. This method tends to lower risk and the average cost per share.
Instead, suppose you have only about $50 per month to invest after monthly expenses. Then, you can still follow a dollar-cost averaging strategy but at a lower dollar amount.
In either case, a prudent investor does not place all their money in a single stock. Instead, it is better to diversify in a handful of stocks and grow the number over time.
Putting all your money in one stock subjects you to single stock risks. Diversification helps reduce that risk.
5 – Select An Order Type
The last step is to select an order type. The two basic order types are a market order and a limit order. There are more order types, but beginners will mainly 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 instance, if you want to buy Coca-Cola (KO) at $62.49 per share and the current price exceeds that value, you won’t buy the stock until the stock price declines.
If the stock price does not decrease, the order expires. A limit order gives you more control over the price you pay per share.
An order can be good for a day (GFD), good till canceled (GTC), or when the order expires, which is usually in 60-days.
The basics are simple for beginners trying to figure out how to buy stocks.
One caution is that many investors spend too much time looking at their portfolios after buying their first stock. However, if you have an investment strategy and follow it, you need only monitor your stock portfolio periodically.
Keep your goals in mind and why you are buying stocks in the first place when making your stock investments and purchases.
There is always more to learn too. Investing in stocks is a lifelong learning process as the market and technology constantly change.
Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
This post originally appeared on Savoteur.