How to buy stocks: A step-by-step guide
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It’s never been easier to buy stock. If you have a little bit of money and a brokerage account, you can buy a piece of a publicly traded company. A stock is an ownership share in a business, and literally thousands of them trade on a stock exchange, allowing anyone – even beginners – to become a part owner in the company.
Here’s how to buy stock and the steps you need to take to become a stockholder.
1. Choose your online broker
You’ll need to get set up with a broker to buy stock, but that takes only minutes. The broker lets you purchase and sell stock, holds the shares for you in an account and collects any dividends that are paid. You’ll need to provide basic financial information to open the account and can connect your bank account to the brokerage to transfer money.
An online broker is a great first choice. Most brokers don’t charge any trading commissions on stocks and have no account minimum to get started. But you could also go with a trading app, especially if you want to trade less frequently via a mobile device.
You can find a broker that fits your needs among the best brokers for beginners.
2. Research and analyze stocks to buy
If you’re interested in buying individual stocks, you’ll need to research and figure out if the stock is a good buy or a “goodbye.” And that can take a lot of upfront work if you want to succeed.
You’ll want to understand the company, its products, its balance sheet and its industry. So you’ll need to read through its filings with the Securities and Exchange Commission (SEC). That will give you lots of detail about what you’re investing in and its potential. But you may also want to use some of the top techniques of the pros, including doing your own first-hand research.
From your research you can develop an investment thesis for the stock or discard it and look at another potential candidate. You’ll want to buy stocks that look poised to outperform for years rather than one you think will do better next week or month. That is, you want to invest long term and think like the owner of a business, not a stock trader looking to make a quick buck.
To gauge yourself, ask: “If the market closed tomorrow and I was unable to sell this stock, would I want to own it for the next ten years?” This can get your mind focused on the right time frame.
When you find an attractive stock, note its ticker symbol, typically a three- or four-letter code.
3. Figure out how much you can invest
You’ll want to determine how much stock you can buy right now. If you’re just starting to invest, the good news is that you can invest with almost any amount of money, since many brokers allow you to trade fractional shares. So you can buy a partial share, even on those really pricey stocks. It’s ok to start small. With no-commission online brokers, your money won’t be eaten up by fees.
But real wealth is built by adding to your investments over time, ideally at regular intervals. So you’ll want to figure out not only how much you can invest now but also how much you’re able to add to your account over time. This can allow you to take advantage of dollar-cost averaging, a process that spreads your buying over time and reduces your risk.
If you’re investing more than a few thousand dollars, you’ll want to consider buying more than one stock, so that you’re diversifying and spreading your risk.
4. Place your trade
It’s finally time to place your trade. Using the stock’s ticker symbol, you can enter an order with your broker. You’ll need to also specify what kind of order you want to place: market order or limit order:
- Market order: This type lets you transact at whatever the best price is at the moment you send in your order. You won’t have control over what price you transact at.
- Limit order: This type lets you transact only at the price you specify or better. If you can’t get your price or better, the order won’t execute. You may set a limit order to be valid for up to three months, though some brokers allow them to sit longer.
Market orders are better when you’re transacting just a few shares or when the stock is large and liquid. Limit orders work better on smaller stocks that don’t trade many shares or when you’re trading a significant number of shares and don’t want your trade to move the price.
Once the trade is executed, you own the stock.
5. Track your stock
Buying a stock is only part of the process of being a stockholder. You’ll also need to continue following the company, tracking quarterly or annual earnings and keeping up with the industry. And as the company performs well, you can allocate more money to the position. Then you can add more stocks to your portfolio as your expertise grows.
Along the way your stock will decline at some point, even if it’s only temporary. Understanding the company can help you decide whether it’s time to buy more stock at a discount or sell.
Finally, if you’re looking to get started investing, you should know that you have other options. As Warren Buffett advises: “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
If you don’t want to spend the time following your stock, you have lots of ways to make money in the stock market, including index funds. Index funds often own hundreds of stocks, offering the benefit of diversification without the extra work of analyzing and evaluating individual stocks.
Here are some of the best index funds.
Buying stocks: FAQ
Do I need a broker to buy stocks?
A brokerage account allows you to buy stocks and other securities (such as ETFs, options, mutual funds, bonds and more). You can open an account with an online brokerage, a full-service brokerage (a more expensive choice) or a trading app such as Robinhood or Webull. Any of these choices will allow you to buy stock in publicly traded companies.
However, your bank account or other financial accounts will not allow you to purchase stocks. But your bank may operate a brokerage, so you can open an account with the brokerage and buy stock there. For example, Bank of America owns Merrill Edge, J.P. Morgan Chase offers J.P. Morgan Self-Direct Investing and Wells Fargo operates WellsTrade.
Is now a good time to buy stocks?
The stock market has gone up an average of 10 percent annually historically, though the returns can fluctuate a lot from year to year. Some years stocks may fall 20 to 30 percent, while in other years they may rise similarly. But experts recommend investing for the long term rather than trying to “time the market.” Timing the market means trying to find the best time to buy and sell.
Experts have a saying for this: “Time in the market is more important than timing the market.” That is, your investment returns – particularly a well-diversified portfolio – depends more on how long you stay invested than it does on how well you time your buy and sell points. In other words, research shows that passive investing tends to outperform active investing. So that’s one way that even amateur investors can beat the professionals.
Will I have to pay taxes on the profits?
Any realized gains on your investments will create a tax liability in taxable accounts (that is, accounts that are not an IRA, 401(k) or other tax-advantaged accounts). You’ll have to pay taxes on any dividends as well as any realized capital gains – stocks you sold for a gain.
The tax rate you pay depends on your income and how long you owned the security. If you owned the security for less than a year, you’ll have a tax rate that is the same as your income rate. If you owned a stock for more than a year, you’ll pay the long-term capital gains rate, which may be more or less than your short-term rate (and sometimes even at a 0 percent rate).
Bottom line
Beginners interested in buying a stock should understand that it’s simple to place a trade. But the hardest steps in the process are researching your investments and continuing to follow your stocks after you’ve bought them. If you’re just starting out, it’s useful to go slowly and invest small amounts until you feel comfortable with how to buy stock.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.