How To Buy Stocks: The Ultimate Guide - MagnifyMoney

How To Buy Stocks: The Ultimate Guide

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Learning how to buy stocks is like learning to ride a bike: It’s a simple process once you get the basics down. But what stock buying basics do you need to know to help your portfolio avoid those “hit the pavement” moments (ouch!)?

In this Ultimate Guide to Buying Stocks, we’ll walk you through the entire process. We’ll start with five simple steps to help you buy your first stock. Then, we’ll wrap-up with the ever-important sixth step: keeping track of the shares you own.

Step 1: Decide how you’ll buy stock

You can buy individual stocks in two main ways: through a brokerage (online or full-service) or directly from the issuing company.

Online brokerages

Online brokerage accounts are likely the fastest, easiest and lowest cost tool to start buying stocks. Once you select your online broker, you can usually fund your account via an ACH transfer from your bank and potentially start trading in less than 15 minutes.

When deciding between online brokers, be sure to review account fees, minimums and trading commissions. Fees can vary widely between brokerages and trading account types. We’ve made a list of the best online brokers to jump-start your search if you want expert guidance.

Full-service brokerages

You’ll typically find full-service brokerage capabilities through financial advisory and wealth management firms. While many firms include trading commissions in all-inclusive fees like assets under management (AUM) fees, other firms still charge per-trade commissions.

If you’re looking to control costs, buying stock through a commission-free online broker or direct purchase plan could be better options than a full-service brokerage with commissions.

Direct stock purchase plans

Some companies still offer direct stock purchase plans if you want to go straight to the source. These plans cut out the middleman (the brokerage) and let you purchase stock shares directly from a publicly-listed company through their transfer agent. This third-party service handles ownership of stock shares on the company’s behalf. For example, Home Depot, Starbucks and Walmart all offer direct stock purchase plans.

You’ll avoid trading commissions with direct purchase plans, but you could be on the hook for other fees and higher investment minimums. For example, Home Depot’s plan requires new investors to make a $500 minimum investment and pay a $5 purchase service charge — and a hefty $25 fee on all sales.

Step 2: Do your research

Think about investments as you might do with cars — they have three things in common:

  1. Once you’ve bought them, they’re yours.
  2. They’re only worth what someone is willing to pay on the date you want to sell.
  3. You probably shouldn’t buy either without doing some research.

Whether you’re buying for the long term, getting in on a trend or generating some regular income through dividends, research can help identify stocks that best align with your investment goals.

Here are some tools you can use to help you research potential stocks to buy:

  • Stock screeners. Many online brokerages offer stock screening tools for account holders. If you haven’t yet opened an online brokerage account, try the free stock screeners offered by Yahoo! Finance or Finviz.
  • Analyst ratings. Analyst reports give you expert insights from financial professionals whose literal job is to follow companies and assess their financial health. Analysts typically set price targets (an estimate of fair market value) and rate whether stocks are, in their professional opinions, a buy, hold or sell.
  • Financial reports. Publicly-traded companies must file quarterly financial reports (10Q reports) with the Securities and Exchange Commission (SEC). You can review these reports on a company’s website, generally on their investor relations page. They’re also available on Yahoo! Finance under “SEC reports.”

As you review potential stocks for your portfolio, here’s one extra tip: If anyone tells you that a stock is a “sure thing,” the best move is to run in the opposite direction.

Step 3: Decide how many shares to buy

Once you know which stocks you want to buy, the only task left is deciding how many shares to buy of each stock. And don’t feel stressed about this decision — we’re here to make that decision easier. A few ways you can make this decision are by:

  • Starting small. You can buy one share of stock to get a feel for the whole order-placing process.
  • Setting a dollar limit. Say you have $200 to invest. You could decide to invest $200 in one stock or split it up, investing $100 each in two separate stocks.
  • Setting a number of shares. If you’re a fan of neat numbers, you might decide to buy 10 shares of a stock and fund your account with enough to make that trade happen.

The important part of this step is to buy stock at a pace and dollar amount that makes sense for you. Then, even if you start small, you can add to your position in the future.

Step 4: Choose your order type

You’ll see multiple order types on your broker’s order page when placing an order. Here’s a breakdown of the most common order types you need to know when you start buying stocks:

Market order. An order that’ll be executed immediately but doesn’t guarantee the price.

In action: If you enter a market order for 10 Company MMI (MMI) shares, your brokerage will fill your order immediately at the current net asset value (NAV) price for that stock.

Limit order. An order to buy or sell a stock at a price you name or better. (Note that “better” depends on whether you’re making a purchase or sale: You’ll want your limit price lower than the current price for purchases and higher for sales.)

In action: If MMI currently trades with a NAV of $15.13, you can place a limit order to buy at $15. Your order will only be executed if MMI’s NAV drops to $15 or less.

Stop order (or stop-loss order). An order to buy or sell at a set price. When the stock hits your designated stop price, it becomes a market order.

In action: If you bought 10 shares of MMI at $15 and you’re concerned with limiting losses, you can place a stop order at $14. Should MMI drop to $14, your sell order will immediately be executed — limiting your losses to $1 per share.

Stop-limit order. A buy or sell order with two parts: a stop price (which activates the order) and a limit price (the price that deactivates your order).

In action: If MMI currently trades at $15, you could place a buy stop-limit order with a stop price at $14 and a limit price at $15. If MMI’s price drops to $14, your order will execute at any price between $14 and $15.

While figuring out how to buy stock, we recommend that you stick to market orders. This standard order type is straightforward — you’ll only have to designate the number of shares you want to buy. However, once you get used to buying stock, you can venture into more complex order types and stock trading strategies, like day trading.

Step 5: Place your order

When you’re ready to buy stock, head to your online brokerage’s order page. There, you’ll find a simple 3-step process to place your order (also known as a trade):

  1. Enter the stock’s ticker symbol.
  2. Enter the number of shares you want to buy.
  3. Submit your order.

If you’ve used a market order, you’ll see the shares appear in your account in moments. And some congratulations are in order — you now own stock!

Don’t forget to track your stocks

Investing in stock doesn’t stop with your purchase. It’s important to track your stocks to ensure they’re doing the job you hired them to do. For example, if you bought 100 shares of MMI at a share price of $15 for its growth potential in your Roth IRA and the price drops over two years to $10, you might consider replacing that stock.

But tracking your investments doesn’t mean you have to stay glued to your computer all day — here are some simple tools that can help you track the stocks you own:

  • Price alerts. Most online brokerages let you set price-specific alerts on individual stocks. Then, when your stock hits the price you set, you can receive various alerts via text, email or in your account dashboard.
  • News alerts. Major search engines let you set up alerts using a company’s name or stock ticker. However, we recommend using the stock ticker, especially if it’s a popular company with frequent news mentions. Using the ticker can help limit your alerts to the company’s financial news but likely won’t filter out all the non-financial news.
  • Spreadsheets. You can manually track your stocks using a spreadsheet if you love the thrill of a grid-like format. In addition, updating a spreadsheet can get you in the habit of keeping an eye on your holdings.

There’s no single best way to track your stock holdings. What’s most important is that you keep yourself updated on whichever systems you choose to use.

Now you know the basics of how to buy stocks and keep up with your investments once they join your portfolio. And just like riding a bike, these stock-buying basics can help you get your balance and improve your skills, so you can make more advanced investing decisions down the road.

Frequently asked questions

You can buy stock through a broker — a human stockbroker like a financial advisor or an online brokerage. However, you can also buy stock directly from some companies using direct stock purchase programs. These programs cut out brokers but can have fees that exceed those you’d pay at an online brokerage.

With plenty of online brokerages offering commission-free trades, you can likely avoid paying commissions when you buy or sell stock. If you’re an active trader, however, you might find that you’ll have to pay some commissions. Therefore, we recommend comparing commission charges from multiple brokerages before opening a brokerage account.

Stocks are securities that give you an equity ownership stake in a company, with shares being the smallest units of equity ownership you can buy. So, if you own 1,000 shares of stock in a company with 1 million outstanding shares, you would have a 1% ownership stake in the company.

The answer depends on your investment goals and time horizon. For example, if you’re saving for retirement (a long-term goal), you can buy stock at regular intervals and lower your overall cost per share — regardless of market conditions. For example, if you buy 100 shares of XYZ at $100 today and 100 shares of XYZ at $150 three months from now, your average cost per share is only $125. On the other hand, if you’re day trading (a short-term goal), current stock market conditions would dictate if today’s a good time to buy stock and make a quick profit.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.