Wednesday, February 28, 2024

What are the 7 Steps to Buying Stocks? Step-by-Step Guide for Beginners

HomeWARWhat are the 7 Steps to Buying Stocks? Step-by-Step Guide for Beginners

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Buying your first stocks can be an exciting yet daunting experience. With thousands of stocks to choose from, how do you decide what to buy? And once you pick a stock, how exactly do you go about purchasing it?

This comprehensive guide will walk you through the entire stock buying process in 7 easy-to-follow steps. By the end, you’ll have all the knowledge you need to confidently buy stocks on your own.

Table of Contents

  • Step 1: Choose an Online Broker
  • Step 2: Open a Brokerage Account
  • Step 3: Fund Your Account
  • Step 4: Select Stocks to Buy
  • Step 5: Decide How Many Shares to Purchase
  • Step 6: Place a Trade Order
  • Step 7: Manage Your Portfolio
  • FAQ

Step 1: Choose an Online Broker

The first step to buying stocks is selecting an online brokerage firm. Online brokers allow individual investors to buy and sell stocks through their websites and mobile apps.

When choosing a broker, here are a few key factors to consider:

  • Trading commissions: Many brokers now offer commission-free stock trades, meaning you won’t pay a fee each time you buy or sell. Look for a broker advertising “$0 commissions” or commission-free trading.
  • Account minimum: Some brokers require a minimum deposit to open an account, which can range from $0 to $2,000 or more. Opt for a broker with a low or no minimum.
  • Investment choices: The top online brokers offer stocks, ETFs, mutual funds, options, and bonds. Look for a broker with a wide range of investment products.
  • Trading platforms: Pick a broker with an easy-to-use website and mobile apps. You want a platform tailored to your experience level.
  • Research and education: Leading brokers provide stocks research, investment analysis, and educational resources. Look for courses, videos, articles, and virtual workshops.

The most popular stockbrokers include Charles Schwab, Fidelity, TD Ameritrade, E*Trade, and Interactive Brokers. I recommend choosing an established brokerage like one of these for your first stock purchases.

Comparing all the stockbrokers may feel overwhelming as a beginner. My advice is to open an account with a reputable, mainstream broker advertising commission-free trading. You can always switch or open accounts with other brokers later as you gain experience.

Step 2: Open a Brokerage Account

Once you’ve selected a broker, it’s time to open your brokerage account. The account opening process is fully online and straightforward.

You’ll need to provide some personal identification information, such as:

  • Full legal name
  • Contact information
  • Social Security Number
  • Employment details

Next, you’ll answer questions about your financial situation:

  • Income
  • Net worth
  • Investment objectives
  • Risk tolerance

Based on your inputs, the brokerage will recommend account types, such as retirement (IRA) or taxable accounts. For general investing, choose an individual taxable brokerage account.

After picking your account type, accept the broker’s terms and conditions to complete the application. The entire process takes about 15 minutes.

Once your application is approved, the broker will send a welcome email confirming your account is open. Then you’re ready for the next step!

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Step 3: Fund Your Account

Before you can start buying stocks, you’ll need to deposit money — called funding your account.

You have two options to fund your new brokerage account:

1. Electronic bank transfer

This option links your bank account to your brokerage account for faster transfers. You can quickly move money electronically between accounts. Brokers often provide bonuses for initial fund deposits this way.

2. Wire transfer

A wire instantly transfers money from your bank account to your broker in 1 business day. However, banks typically charge fees for wire transfers ranging from $10 to $45 per transaction.

How much should you deposit?

Experts suggest starting with $500 to $1,000 when you first begin investing in stocks. This gives you enough capital to build a diversified starter portfolio. You can always add more funds later as your investing skills grow.

Once you’ve funded your account, the cash will appear in your brokerage as “buying power” ready to make stock purchases. Now the fun really begins!

Step 4: Select Stocks to Buy

Now that your brokerage account is open and funded, it’s time to find stocks to invest in. With over 5,000 publicly traded stocks, where should you start looking for your first purchases?

Here are three simple strategies to help you pick stocks as a new investor:

1. Choose well-known, stable companies

Look for established, blue-chip stocks from companies you already know and trust. Familiar brands like Apple, Disney, Microsoft, or Coca-Cola are good starter stocks for first-time investors.

2. Invest in what you understand

Select stocks from industries, products, or services you have knowledge in. For example, if you work in healthcare, biotech stocks may be a good sector to focus on.

3. Diversify across market sectors

Aim to own stocks across various sectors of the economy — technology, financials, consumer staples, healthcare, industrials, etc. Diversification reduces risk.

Avoid buying many stocks in the same sector or industry as a beginner. Stick to reputable, financially healthy companies in a few different market sectors.

Now let’s discuss how to analyze stocks from these companies…

Researching and Analyzing Stocks

Before purchasing a stock, take time to analyze the underlying company using these steps:

Step 1: Read financial news and reports

Research recent news about the company, read earnings reports, and review analysis from stock research websites to gain an understanding of the stock.

Step 2: Study financial metrics and valuation

Key metrics to analyze include revenue growth, profit margins, PE ratio, debt levels, and cash flow. Compare to competitors to gauge valuation and financial health.

Step 3: Review company leadership and products

Learn about the executives leading the company and assess if they have a sound strategy. Also evaluate the strength of existing and future products.

Step 4: Analyze charts and trading activity

Use price charts and trading volume activity to examine historical stock performance and trends.

Step 5: Predict future outlook

Consider strengths, weaknesses, opportunities, and threats that may impact future performance. Estimate the stock’s potential upside.

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Don’t overcomplicate your stock analysis as a beginner. Focus on understanding the company’s core business, financials, and leadership team.

Once you’ve analyzed a stock thoroughly, you can decide whether to buy shares. Stick with stocks aligned to your investing strategy that you expect to increase in value over the long-term.

Step 5: Decide How Many Shares to Buy

Before pulling the trigger, determine how many shares you want to purchase. Your position size will depend on:

  • The amount of capital you have available
  • Share price of the stock
  • Your diversification goals

As a new investor, you should start very small — perhaps just a few shares of each stock in the beginning. You can slowly increase your position sizes over time.

For example, if you have $1,000 to invest and want to buy shares of a stock trading at $100 per share, you could purchase:

  • 10 shares to start for $1,000 total
  • Or just 1 share for $100 to test out stock-level investing

Many brokers now offer fractional share investing, allowing you to buy partial shares. This means you can invest as little as $1 or $5 in a single trade.

Dollar-cost averaging is another smart strategy for new investors. This means investing a fixed dollar amount on a regular schedule, such as $200 every month. By sticking to the plan, you reduce market timing risk.

Consider starting small and slow by dollar-cost averaging into your positions over time. Fractional shares are also helpful for your starter portfolio.

Step 6: Place a Trade Order

You’re now ready to place your first real stock trade order!

Follow these steps to buy shares of your selected stocks:

1. Log into your brokerage account

Pull up the trading platform on your broker’s website or app. Make sure you have enough buying power for the trade.

2. Look up the stock ticker

Search for the stock you want to buy to pull up the trading info and quote.

3. Select “Buy” and enter order details

Click the “Trade” button and select “Buy.” Enter the ticker, number of shares, and order type.

4. Review and confirm order

Double-check the order details — ticker, share amount, order type, etc. Then click “Submit order” to place.

5. Check order status

You’ll see your order move to “Pending” then switch to “Filled” once completed.

Types of Trade Orders

When you place a stock trade, you’ll need to specify the order type. The most common order types are:

Market Order — This is the simplest order. It instructs your broker to buy or sell shares of the stock immediately at the best current market price. Market orders get filled quickly but don’t allow you to set a target price.

Limit Order — With a limit order, you specify the maximum price you’re willing to pay for a stock (or minimum for a sale). It offers more control than a market order but may not get filled if the limit price isn’t met.

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Stop Order — A stop order triggers a market order when the stock reaches a certain stop price you define. It’s used to limit downside losses if a stock starts falling.

Stop-Limit Order — This combines a stop order with a limit order. Once the stop price is reached, it becomes a limit order rather than a market order.

As a beginner, I recommend using primarily market orders for simplicity. You can also consider limit orders if you want to set a target entry or exit price.

Step 7: Manage Your Portfolio

Congratulations, you’ve purchased your first stocks!

Now it’s time to monitor and manage your holdings. Here are some tips:

  • Review your positions regularly and track stock prices.
  • Rebalance periodically to bring allocations back to your target.
  • Use dollar-cost averaging to make recurring investments.
  • Adjust stop orders as share prices move up.
  • Sell underperforming stocks at a loss to offset capital gains taxes.
  • Reinvest dividends and profits into new opportunities.
  • Avoid panic selling in down markets. Take a long-term perspective.
  • Limit trading costs by making fewer moves. Follow a buy-and-hold strategy.

Be patient and stick to your long-term investing plan. Over years and decades, the ups and downs of the market smooth out, and your portfolio can steadily grow.

FAQ

How do I know which stocks to buy?

Focus on well-established companies in growing industries. Analyze financial metrics and valuation. Invest in brands you understand and believe in.

Is now a good time to buy stocks?

Historically, there’s no bad time to start investing in stocks for the long run. While market timing is impossible, dollar-cost averaging helps reduce risk.

Can I buy stocks on my own, without a broker?

You need a brokerage account to buy stocks on the stock exchanges. However, you can buy stocks without a broker directly from some companies through direct stock purchase plans. These include GE, Disney, Coca-Cola, and McDonald’s.

How much money do I need to buy stock?

Many brokers allow you to start investing with no minimum deposit. You can buy fractional shares to invest any amount, even just $1. Aim for $500 to $1,000 to start building a diversified portfolio.

Are stocks and shares the same thing?

Yes, the terms ‘stocks’ and ‘shares’ are synonymous. When you buy a stock, you are purchasing shares or equity ownership in a public company.

How many stocks should I buy?

Experts recommend owning at least 15–20 stocks as a beginner. This level of diversification helps reduce portfolio risk and volatility. Stick to a maximum of 30 stocks for simplicity.

What are some cheap stocks to buy now?

Good cheap stocks can have prices under $10 or even $5 per share. Research ‘penny stocks’ for ideas, just be wary of very low-priced stocks under $1 which can be riskier.

And that covers the complete step-by-step guide on how to buy stocks! By following this process, you can confidently enter the markets and purchase your first shares. Here’s to profitable investing!

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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