How To Buy Stocks in 5 Easy Steps

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Buying stocks might seem intimidating if you’ve never done it before. But with the right online stockbroker or investment app, and a willingness to put in some research to learn the fundamentals, it can be a straightforward process to reaching your investment goals. The hardest part comes in doing your research so you understand some basic principles of stock trading. Read on to learn how to buy stocks in five simple steps.

How To Buy Stocks: A Step-by-Step Guide

Stock trading is inherently risky and you should know your risk tolerance before you start. Never invest more than you are willing to lose. Focus on building a diversified portfolio that also includes low-risk investments, such as your 401(k) retirement account. There are many investing paths you can take, but to choose the right one for you, you must start by taking the first step.

Step 1: Choose an Online Stockbroker

The steps to opening an account with an online stockbroker or robo-advisor are pretty much the same as with a full-service brokerage firm. You’ll need to provide personal and financial information, including your name and address, date of birth and Social Security number. You’ll also need to provide funding information, such as your bank routing number and account number or debit card number.

Broker Breakdown

Step 2: Decide Which Type of Stock You Want To Buy

There’s no shortage of choices when it comes to buying stocks or investing in individual stocks. The number of options can be downright overwhelming. That’s why it’s important to understand your risk tolerance, investment objectives and available funds before you begin to invest in the stocks online.

Here are some different types of stocks explained:

• Growth stocks: These include shares of companies with substantial profits and gains in revenue. As the name suggests, these are new or younger companies that are growing or serving markets with high growth potential. Though they can have high gains they are also highly volatile for short-term investments.
• Value stocks: These are shares of companies that are traded at a discount but will hopefully increase in value over time as the market grows the share’s price potential. Think of these as buying stocks on sale, so you get a good deal on a more valuable stock that is underpriced.
• Dividend stocks: These are stocks that give shareholders some of the earnings as dividends. This means you get a steady income from your investments no matter the current market price. 

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Good To Know

An important step in the process is researching stocks you might be interested in and educating yourself on important metrics such as the price-to-earnings ratio and debt-to-EBITDA ratio.

Pay particular attention to finding information about a company’s competitive landscape and management team, as well as how industry trends might impact its stock price.

Doing Your Due Diligence

If you’re researching stocks on your own, consult analyst reports, industry trend bulletins, company prospectuses and company annual reports and conference call transcripts. All of this data can help you get a handle on how a company is performing and where it might be headed next.

Analyst reports in particular can help teach you if a company’s current share price is fair, overvalued or undervalued. These determinations are made by comparing a company’s stock price to items like its earnings, future revenue forecasts and competitor valuations.

Step 3: Think About How Many Shares To Buy

How many shares you want to buy will greatly depend on how much money you have to invest. Here are a few things to consider:

• If you want to start with an amount like $2,000, you’ll want to research the best affordable stocks out there to create a diversified portfolio.
• Some of the best value stocks, for instance, might include established brands like CVS Health and Tyson Foods, which produce steady profits and rank as leaders in their respective industries. 
• Keep in mind, though, stocks like Alphabet — parent company of Google, Amazon and Tesla might have name recognition but it doesn’t always mean they should be your first purchase. However, big names can have big rewards.
• You can also invest in fractional shares, depending on the online brokerage you choose. That can allow you to invest with less money or create a more diversified portfolio.

Step 4: Make Your Order

When you buy your first stock, you’re likely to put in a market order, which is the most common type. With a market order, you’ll buy the stock at whatever the current price is.

Another option is a limit order, which designates a price you’re not willing to exceed. For example, if you want to buy Apple stock at $150 per share but it’s currently trading at $155, you can put in a limit order at $150. Your order won’t be executed unless the share price trades down to $160.

Whether you’re entering a market order or a limit order, be sure to do the math so that you can afford to pay for your purchase. For example, if you want to buy 100 shares of Apple at $160 per share, you’ll have to pay at least $16,000. If your broker charges commissions or other fees, you’ll need to incorporate those into your total purchase price.

Step 5: Diversify Your Stock Portfolio

If you’re a beginner, it’s advisable to start small when it comes to buying your first stocks. If you rush in too quickly, you might end up losing money before you even know what you’re doing.

Next, be sure to diversify your investment portfolio. There are no “sure things” in stock investing, so a diversified portfolio is the best way to reduce your risk. Diversifying your portfolio with different stocks in different industries makes it easier to ride the ups and downs should one industry get hurt by an unexpected event. This makes it especially important to find affordable stocks so you can buy shares in a few different companies.

Glossary of Terms for Buying and Selling Stocks

As you get familiar with how to buy stocks online, here are a few basic investment terms you should understand.

Buying Stocks for Beginners: Key Takeaways

If you are just starting out, you may eventually want to take a page out of the books of experts and financial advisors like Warren Buffet, Dave Ramsey or Suze Orman. That being said here are a few quick takeaways and tips to give you a jumpstart on purchasing stocks:

• If you’re ready to take the plunge, you can start buying stocks online, but first, you need to open a brokerage account.
• As a general rule, your best chance at making money in the stock market is by owning companies with consistent earnings and revenue growth. If a company can outperform the expectations of Wall Street analysts, its stock will typically go up.
• Meme stocks like GameStop and AMC may be tempting in the short term, but consider the long-term future of these companies, their earnings reports and their fundamentals before you make investments you may regret.
• If you want to invest in a few different stocks for diversification purposes but don’t have a lot of money to spend, you can consider such strategies as buying fractional shares as opposed to buying individual stocks of your favorite companies.

Expert Strategy: Warren Buffett’s Investment Style

Warren Buffett, the billionaire investor known as the “Oracle of Omaha,” uses the concept of moats to describe his investment style. According to Buffett, the type of company he wants to own is one with an established competitive advantage over others that is difficult to overcome, just like a wide and deep moat makes it hard for attackers — in this case, business competitors — to cross.

For example, Buffett has long maintained a position in Coca-Cola because while there are certainly plenty of competitors in the beverage industry, Coca-Cola itself is hard to duplicate or surpass. He has also invested in Visa, the world’s largest payment network.

It is also important to remember Buffett’s advice to invest in companies you believe in. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Final Take To GO

Buying stocks used to be a complicated process that mainly catered to wealthy investors and publicly traded companies. With the rise in online brokers, stock trading is open to everyone. Even with only $1,000 or less to invest, you can open an account with a broker in about five minutes online, and you can buy or sell stocks commission-free.

At the same time, just because the door to investing is wide open doesn’t mean you should dive in without doing your homework first. Take the time to fully understand both how to place a stock trade and how the stock market as a whole operates. Keep in mind that stocks are best used as long-term holdings, but you should still check in regularly to find out if any market or financial events might make you consider selling them.

Vance Cariaga, John Csiszar and Dawn Allcot contributed to the reporting for this article.

Information is accurate as of March 19, 2024.

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