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How to Buy Stocks

Buying stocks isn't as difficult as it seems, but you'll need to do some homework -- and master the lingo -- before you buy.

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To buy stocks, you'll need a brokerage account, which takes about 15 minutes to set up. After that, you can use the steps below to search, pick, and invest in individual companies after you've added money to your account.

While it can seem difficult at first, purchasing stocks is actually very easy. To assist you in purchasing your first stock, follow these five steps:

1. Select an online stockbroker

An online stockbroker is the most efficient way to purchase stocks. You can buy stocks via the broker's website in minutes after opening and financing your account. Using a full-service stockbroker or purchasing stock directly from the firm are two other choices.

It's as simple as opening a bank account to open an online brokerage account: You fill out an account application, provide identification, and determine whether to fund the account with a check or by transferring funds electronically.

2. Research the stocks you want to buy

It's time to get serious about stock picking after you've set up and financed your brokerage account. Researching companies you already know from your customer experiences is a good place to start.

Allowing the deluge of data and real-time market gyrations to overtake you when conducting research is a mistake. Keep your target in mind: you're searching for companies in which you'd like to invest.

“Buy into a company because you want to own it, not because you want the stock to go up,” Warren Buffett famously said. By following the precept, he's done very well for himself.

It's time to do some analysis after you've established these firms. Begin with the company's annual report, specifically the annual letter to shareholders from management. The letter will provide you a general overview of what's going on in the company and provide background for the report's figures.

After that, your broker's website will have most of the details and analytical resources you need to assess the firm, such as SEC filings, conference call transcripts, quarterly earnings updates, and recent news. Most online brokers also give tutorials on how to use their equipment, as well as simple stock-picking seminars. 

3. Decide how many shares to buy

There should be no pressure on you to buy a certain number of shares or to invest your whole portfolio in a single stock. Consider starting small -- very small -- by buying only one share to get a feel for what it's like to own individual stocks and if you have the stamina to ride out the bumps with minimal sleep loss. When you master the shareholder swagger, you will increase your position over time.

New stock investors should look into fractional shares, which are a relatively new product from online brokers that allow you to purchase a portion of a stock rather than the whole share. That means you can spend far less in costly stocks like Google and Amazon, which are known for their four-figure share prices.

Many brokerages also have a method for converting dollar amounts to securities. This is useful if you know how much money you want to spend -- say, $500 -- and want to know how many shares that money will purchase.

4. Choose your stock order type

Don't be turned off by your broker's online order page's jumble of numbers and incomprehensible word combinations. Use this glossary of simple stock-trading terms as a guide:

Term - Definition:

Ask - For buyers: The price that sellers are willing to accept for the stock.
Bid - For sellers: The price that buyers are willing to pay for the stock.
Spread - The difference between the highest bid price and the lowest ask price.
Market order - A request to buy or sell a stock ASAP at the best available price.
Limit order - A request to buy or sell a stock only at a specific price or better.
Stop (or stop-loss) order - Once a stock reaches a certain price, the “stop price” or “stop level,” a market order is executed and the entire order is filled at the prevailing price.
Stop-limit order - When the stop price is reached, the trade turns into a limit order and is filled up to the point where specified price limits can be met.

There are a number of complicated order forms and fancy trading moves. Don't bother now -- or maybe ever. Market orders and limit orders are the only order forms that have proven to be popular in the stock market.

MARKET ORDERS

You're signaling that you'll buy or sell the stock at the best available current market price with a market order. Since a trading order has no price parameters, it will be executed immediately and fully filled, unless you're trying to purchase a million shares in a takeover attempt. Don't be shocked if the price you pay -- or get if you're selling -- isn't the same as the one you were quoted only seconds ago. Throughout the day, the offer and ask rates fluctuate continuously. That's why a market order is better for buying stocks that don't have big price fluctuations, such as large, stable blue-chip companies rather than smaller, more volatile businesses.

Good to know:

A trading order is better for buy-and-hold investors who are more concerned with ensuring that the transaction is completely conducted than with minor price differences.

If you place a market order after the markets have closed for the day, your order will be filled at the current market price when the exchanges reopen for business the next day.

Check the trade execution disclaimer on your broker's website. Some low-cost brokers group all customer trade requests together to conduct them all at the same time at the current price, either at the end of the trading day or on a fixed time or day of the week.

LIMIT ORDERS

You have more leverage over the price at which your trade is executed with a limit order. If XYZ stock is trading at $100 per share and you believe it is worth $95 per share, your limit order instructs your broker to hold on and execute your order only when the ask price falls to that amount. A limit order instructs your broker to sell your shares once the bid increases to the amount you specify.

Limit orders are a useful method for investors buying and selling smaller company stocks, which also have broader spreads due to market behavior. They're also useful for trading during times of high short-term stock market volatility or when stock price trumps order fulfillment.

You may add additional conditions to a limit order to regulate how long the order will be available. Only when all of the shares you choose to sell are eligible at your price cap will a "all or none" (AON) order be enforced. And if the order has not been completely filled, a "good for day" (GFD) order will expire at the end of the trading day. A "good till cancelled" (GTC) order is valid until the customer cancels it or the order expires, which can take anywhere from 60 to 120 days.

Good to know:

A limit order guarantees the price you'll get if the order is executed, but it doesn't guarantee that the order will be filled fully, partially, or even at all. Limit orders are issued on a first-come, first-served basis, after market orders have been filled, and only if the stock remains within your defined parameters long enough for the broker to conduct the trade.

Limit orders can be more expensive than market orders in terms of commissions. A limit order that cannot be filled in full at one time or on a single trading day may be filled over several days, with transaction costs being paid each day a trade is conducted. The trade will not be executed if the stock never exceeds the threshold of your limit order until it expires.

5. Optimize your stock portfolio

We hope that your first stock purchase marks the start of a fruitful investment career. But, if things get tough, keep in mind that every investor, including Warren Buffett, has bad days. The secret to long-term success is to maintain your perspective and focus on the things that you can manage. The stock market's gyrations aren't one of them. However, you do have some influence over a few things.

Take the time to learn about other aspects of the investing environment once you've mastered the stock buying process. What role will mutual funds play in your investment strategy? Have you opened a savings account, such as an IRA, in addition to a brokerage account? Opening a brokerage account and purchasing stocks is an excellent first step, but it's just the start of your investment journey.

Frequently asked questions

What are the best stocks for beginners?

Since there is no such thing as a "best stock," many financial advisors recommend investing in low-cost index funds. Beginners should prefer blue-chip stocks in the S&P 500 if they want to add a few individual stocks to their portfolio. These are some of the most profitable companies in the world, with a track record of providing investors with long-term returns.

What are the best stocks for beginners?

Since there is no such thing as a "best stock," many financial advisors recommend investing in low-cost index funds. Beginners should prefer blue-chip stocks in the S&P 500 if they want to add a few individual stocks to their portfolio. These are some of the most profitable companies in the world, with a track record of providing investors with long-term returns.

Is now a good time to buy stocks?

The reality is that you'll never know when is the best time to buy stocks. If you're planning to invest for the long term (say, more than five years), the best time to buy stocks is as soon as you have the funds. And if the market declines right after you invest, you'll have plenty of time to recover your losses.

How do I buy stocks online without a broker?

Online brokers have made it increasingly simple for newcomers to sign up for and use their services in recent years. An online brokerage account would be the most convenient way to enter the stock market for most new investors.

However, if you do want to invest without using a broker, search for companies that have a direct stock plan, which allows you to buy shares directly from the company for a low to no cost. These programs can often offer the option of investing by dollar amount rather than by share, and they frequently allow investors to set up recurring investments on a set schedule.

A dividend reinvestment plan, which allows investors to automatically reinvest dividends back into the stock rather than taking them as cash, is another way to buy stocks without a broker. However, much like direct stock plans, you'll have to search for companies that sell these services.

How much money do I need to buy stock?

You might start investing with only enough money to buy a single share if you open a brokerage account with no account minimums and no transaction fees. It may be as little as $10, depending on the business (though bear in mind that cheap stocks aren't always good buys).

Some brokerages also allow you to buy fractional shares, which means that even if you only have $100 to invest, you can get a piece of a stock like Google, which has long traded for more than $1,000 per share. Of course, the more money you put in, the better your chances of making a profit in the long run.

Are stocks and shares the same thing?

Yes, for the most part. The words "stock" and "shares" both refer to ownership -- or equity -- in a company. Typically, “shares” refers to the size of an ownership stake in a company, while “stock” refers to the total amount of equity. Investors can say things like, "I bought 10 shares of Apple," or "I have stock in Apple, Facebook, and Amazon."

How many shares should I buy?

The number of shares you purchase is determined by the amount of money you choose to invest. You could buy 10 shares for $50 if the share price is $50 and you have $500 to invest. You'll have to round down if your brokerage doesn't support fractional trading and the numbers aren't quite correct.

What are some cheap stocks to buy now?

It's important to remember that a stock's price doesn't tell you anything you need to know about a company you're thinking about investing in. The price represents how much investors are willing to pay to purchase or sell a stock, not the company's intrinsic value or the direction in which the stock price is going. Simply because a stock is "cheap" does not mean it is a good investment.

However, there are methods for locating stocks that might be undervalued. This technique aids investors in identifying experienced companies with stock values that are likely to be lower than the stock is worth due to external factors such as a declining stock market.

There are, however, methods for locating stocks that may be undervalued. This approach assists investors in finding established businesses with stock values that are lower than the stock is worth due to external factors such as a weakening stock market.

How will I know when to sell stocks?

If you're buying stocks, you should be able to keep your money for at least five years without touching it. Because of stock market fluctuations, it's likely that the value of your shares could decrease until increasing. If you need money and your stocks have appreciated in value, you might sell them, but you'll have to pay capital gains taxes on the sale and lose out on potential gains.

What's more critical, though, is to think about when not to sell stocks. You can be tempted to sell while the price is dropping to avoid more losses. This is generally regarded as a poor strategy, since if you sell, you've locked in your losses. A smarter approach is to ride out the market's uncertainty and look for long-term gains, knowing that the market will eventually recover.

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