Investing in the stock market has become increasingly accessible to the general public. With a brokerage account and a small amount of money, anyone can purchase shares of a publicly traded company.
A stock represents a portion of ownership in a business, and there are thousands of stocks available for trading on various stock exchanges.
For those new to the world of investing, the process of buying stock may seem daunting. However, with the right guidance and knowledge, becoming a stockholder can be a straightforward process.
In the following paragraphs, we will outline the steps necessary to purchase stock and become a part owner in a company.
1. Choose Your Online Broker
To buy and sell stocks, one needs to set up an account with a broker. An online broker is a great option for beginners as they don’t charge any trading commissions on stocks and have no account minimum to get started.
Another option is to go with a trading app, especially if you want to trade less frequently via a mobile device.
To find the right broker, it’s important to consider your needs. Some brokers offer additional services such as research and educational resources, while others may have better trading platforms or customer service. It’s also important to consider the fees and commissions charged by the broker.
Once you’ve chosen a broker, you’ll need to provide basic financial information to open the account and can connect your bank account to the brokerage to transfer money. The broker will hold the shares for you in an account and collect any dividends that are paid.
Overall, choosing the right online broker is an important step in investing in the stock market.
2. Research and Analyze Stocks to Buy
Before investing in individual stocks, it is essential to conduct thorough research to determine if a stock is a good buy or a “goodbye.” Investing in stocks requires a significant amount of upfront work to achieve success.
Investors must understand the company, its products, its balance sheet, and its industry. To gain a comprehensive understanding of the stock, investors must read through the company’s filings with the Securities and Exchange Commission (SEC). These filings provide detailed information about the company and its potential.
To increase the chances of success, investors can use some of the top techniques of the pros, including conducting their first-hand research. By researching the stock, investors can develop an investment thesis for the stock or discard it and look at another potential candidate.
Investors should aim to buy stocks that are poised to outperform for years rather than ones that will perform better next week or month. In other words, investors should invest long term and think like the owner of a business rather than a stock trader looking to make a quick buck.
To gauge the potential of a stock, investors should ask themselves if they would want to own the stock for the next ten years if the market closed tomorrow and they were unable to sell it. This question can help investors focus on the right time frame.
When investors find an attractive stock, they should note its ticker symbol, typically a three- or four-letter code. This ticker symbol will be used to track the stock’s performance and make trades. By conducting thorough research and analyzing stocks, investors can increase their chances of success and make informed investment decisions.
3. Determine Your Investment Amount
Before investing, it is important to determine how much money you can afford to invest.
Fortunately, many brokers allow trading of fractional shares, meaning you can invest with almost any amount of money. Starting small is okay, and with no-commission online brokers, you won’t lose money to fees.
However, building real wealth requires adding to your investments over time, ideally at regular intervals. This allows you to take advantage of dollar-cost averaging, which spreads your buying over time and reduces your risk.
Therefore, it is important to not only determine how much you can invest now but also how much you can add to your account over time.
If you are investing more than a few thousand dollars, it is recommended to consider buying more than one stock to diversify and spread your risk. Creating a budget and setting aside a portion for investing can help you determine your investment amount. It is important to only invest what you can afford to lose and to regularly reassess your investment strategy.
4. Place Your Trade
After conducting thorough research and analysis, it’s time to place your trade. Using the stock’s ticker symbol, you can enter an order with your broker. However, before placing your order, you need to decide which type of order to use: market order or limit order.
A market order allows you to transact at the best available price at the moment you send in your order. This type of order is suitable when you’re transacting a few shares or when the stock is large and liquid. On the other hand, a limit order allows you to transact only at the price you specify or better.
If you can’t get your price or better, the order won’t execute. This type of order is more suitable for 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.
When placing a limit order, you may set it to be valid for up to three months, although some brokers may allow them to sit longer. Once the trade is executed, you will own the stock. It’s important to note that the execution of your trade may take some time, especially if you’re using a limit order. Therefore, it’s essential to monitor your trade closely and adjust your order if necessary.
5. Track Your Stock
Buying a stock is just the beginning of the journey towards becoming a successful stockholder.
It is important to keep track of the company’s performance, its quarterly and annual earnings, and stay updated with the industry trends. As the company performs well, one can allocate more funds to the position and add more stocks to their portfolio as their expertise grows.
However, it is important to note that stocks can decline at some point, even if it’s temporary. One must understand the company’s performance and analyze whether it’s time to buy more stock at a discount or sell.
For those who do not want to spend time following their stock, there are other options available. As per Warren Buffet’s advice, investing in index funds is a good option. Index funds offer the benefit of diversification without the extra work of analyzing and evaluating individual stocks.
Here are some of the best index funds:
| Index Fund | Expense Ratio | Minimum Investment |
|---|---|---|
| Vanguard Total Stock Market Index Fund (VTSMX) | 0.14% | $3,000 |
| Fidelity 500 Index Fund (FXAIX) | 0.015% | None |
| Schwab Total Stock Market Index Fund (SWTSX) | 0.03% | $100 |
| iShares Core S&P 500 ETF (IVV) | 0.04% | None |
Tracking your stock is an important aspect of investing. With the right knowledge and expertise, one can make informed decisions and reap the benefits of investing in the stock market.
Buying stocks: FAQ
Do I need a broker to buy stocks?
To buy stocks, you need a brokerage account. This allows you to purchase stocks and other securities, such as ETFs, options, mutual funds, and bonds. You can open an account with an online brokerage, a full-service brokerage, or a trading app like Robinhood or Webull.
All of these options will enable you to buy stock in publicly traded companies. However, your bank account or other financial accounts will not allow you to purchase stocks. Some banks may operate a brokerage, such as Bank of America’s Merrill Edge, J.P. Morgan Chase’s J.P. Morgan Self-Direct Investing, or Wells Fargo’s WellsTrade. You can open an account with the brokerage and buy stock there.
Is now a good time to buy stocks?
The stock market has an average annual return of 10 percent, but returns can fluctuate significantly from year to year. Some years, stocks may fall by 20 to 30 percent, while in other years, they may rise similarly. 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 say that “time in the market is more important than timing the market.” In other words, your investment returns, particularly a well-diversified portfolio, depend more on how long you stay invested than on how well you time your buy and sell points. Research shows that passive investing tends to outperform active investing, so even amateur investors can beat the professionals.
Will I have to pay taxes on the profits?
Yes, any realized gains on your investments will create a tax liability in taxable accounts, which are 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, which are 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
Buying stocks can be a simple process, but beginners should take the time to research their investments and monitor their stocks after purchase. It’s recommended to start slowly and invest small amounts until you feel comfortable with the process.
It’s important to conduct independent research and not rely solely on past performance as an indicator of future success. All investors should be aware of the risks involved and make informed decisions based on their own financial goals and risk tolerance.