Investors most commonly buy and trade stock through brokers.
You can set up an account by depositing cash or stocks in a brokerage account. Firms like Charles Schwab and Citigroup’s Smith Barney unit offer brokerage accounts that can be managed online or with a broker in person. If you prefer buying and selling stocks online, you can use sites like E-Trade or Ameritrade. Those are just two of the most well-known electronic brokerages, but many large firms have online options as well.
Once you open an account you will tell your broker how many and what types of stocks you’d like to purchase. The broker executes the trade on the your behalf. In turn, he or she earns a commission, normally several cents per share. Online trading sites typically charge lower commission fees, because most of the trading is done electronically.
After selecting the stocks that you want to purchase, you can either make a “market order” or a “limit order.” A market order is one in which you request a stock purchase at the prevailing market price. A limit order is when you request to buy a stock at a limited price. For example, if you want to buy stock in Dell at $60 a share, and the stock is currently trading at $70, then the broker would wait to acquire the shares until the price meets your limit.
- Decide whether to go through an online brokerage firm or through a face-to-face broker.
- After evaluating a stock, decide the prices you'd like to purchase at, so you know whether to make a "market" or "limited" order.
- To save on broker fees, you can buy some stocks directly from the company.
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How to Buy Stocks
Buying a stock — especially that first time you become a bona fide part owner of a business — deserves its own celebratory ritual. But before we pick out shareholder party hats and rent a ticker tape confetti cannon, let’s go through the basics of how to buy stocks.
Open a brokerage account
Opening a brokerage account is as easy as setting up a bank account: You complete an account application, provide proof of identification and choose how you want to fund the account. You may fund your account by mailing a check or transferring funds electronically.
So how do you find a broker that’s worthy of your dough? It’s not just about finding the one with the cheapest trading commissions. Paying a few bucks more per trade at a brokerage that provides high-quality customer service is worth it, especially at the start of your investing journey.
Some other things to consider:
- How much money you have. Many online brokers have a $0 minimum requirement to set up a traditional individual retirement account or Roth IRA. For a regular brokerage account, the minimums can range from $0 to $2,000 or more.
- How frequently you plan to trade. At most brokers suitable for new investors, stock trading commissions run between $5 and $10. Low commission costs will be more important to active traders, those who place 10 or more trades per month. Infrequent traders should steer clear of brokers that charge inactivity fees.
- How much support you want. Consider the broker’s offerings of educational tools, investment guidance, stock-trading research and access to real, live humans via phone, email, online chat or branch offices.
Select your stocks
Once you’ve set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experiences as a consumer.
Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You’re looking for companies of which you want to become a part owner.
Warren Buffett famously said, “Buy into a company because you want to own it, not because you want the stock to go up.” He’s done pretty well for himself by following that rule.
Start with the company’s annual report — specifically management’s annual letter to shareholders. The letter will give you a general narrative of what’s happening with the business and provide context for the numbers in the report.
After that, most of the information and analytical tools that you need to evaluate the business will be available on your broker’s website, such as SEC filings, conference call transcripts, quarterly earnings updates and recent news. Most brokers also provide tutorials on how to use their tools and even basic seminars on how to pick stocks.
To learn more about evaluating companies for your portfolio, see NerdWallet’s feature on how to research stocks.
Decide how many shares to buy
You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio position in a stock all at once. Consider starting small — really small — by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master the shareholder swagger.
Choose your order type
Don’t be put off by all those numbers and nonsensical word combinations on the order page. Refer to this cheat sheet:
Tips for buying stocks
- Set up a watchlist of stocks you’re interested in purchasing.
- Use a “market” order to buy now and a “limit” order to set a price target.
- Start with a small position and add to it over time.
- Decide up front what would make you sell the stock.
There are a lot more fancy trading moves and complex order types. Don’t bother right now — or maybe ever. Investors have built successful careers relying solely on two order types: market orders and limit orders.
With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. Because a market order puts no price parameters on the trade, your order will be executed immediately and fully filled, unless you’re trying to buy a million shares and attempt a takeover coup.
Don’t be surprised if the price you pay — or receive, if you’re selling — is not the exact price you were quoted just seconds before. Bid and ask prices fluctuate constantly throughout the day. That’s why a market order is best used when buying stocks that don’t experience wide price swings — large, steady blue-chip stocks as opposed to smaller, more volatile companies.
Good to know:
- A market order is best for buy-and-hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.
- If you place a market order trade “after hours,” when the markets have closed for the day, your order will be placed at the prevailing price when the exchanges next open for trading.
- Check your broker’s trade execution disclaimer. Some low-cost brokers bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or a specific time or day of the week.
A limit order gives you more control over the price at which your trade is executed. If XYZ stock is trading at $100 a share and you think a $95 per-share price is more in line with how you value the company, your limit order tells your broker to hold tight and execute your order only when the ask price drops to that level. On the selling side, a limit order tells your broker to part with the shares once the bid rises to the level you set.
Limit orders are a good tool for investors buying and selling smaller company stocks, which tend to experience wider spreads, depending on investor activity. They’re also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment.
There are additional conditions you can place on a limit order to control how long the order will remain open. An “all or none” (AON) order will be executed only when all the shares you wish to trade are available at your price limit. A “good for day” (GFD) order will expire at the end of the trading day, even if the order has not been fully filled. A “good till canceled” (GTC) order remains in play until the customer pulls the plug or the order expires; that’s anywhere from 60 to 120 days or more.
Good to know:
- While a limit order guarantees the price you’ll get if the order is executed, there’s no guarantee that the order will be filled fully, partially or even at all. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade.
- Limit orders can cost investors more in commissions than market orders. A limit order that can’t be executed in full at one time or during a single trading day may continue to be filled over subsequent days, with transaction costs charged each day a trade is made. If the stock never reaches the level of your limit order by the time it expires, the trade will not be executed.
Congratulations, you’re now a stock investor
We hope your first stock purchase marks the beginning of a lifelong journey of successful investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them. What you can do is:
- Make sure you have the right tools for the job. NerdWallet’s list of the best brokers for beginners may help.
- Be mindful of investing fees. These can significantly erode your returns.
- Establish investing rules to help you keep cool when others panic.
How to get started buying stocks
Stock tips spill from everywhere: on social media, on TV, at parties, in the gym. Email boxes are full of pitches for can’t-miss moneymakers to buy right now. Even your own scouting efforts spot stocks whose solid growth seems like solid gold.
Pick any stock and someone will be able to spin a story about why it’s a great opportunity.
But when you are interested in investing in stocks, here’s what you need to know.
What to watch out FOR
Stocks need a catalyst, a spark to get them moving. Maybe it’s a new product, a management change or gaining market leadership. Being in a hot sector helps, but don’t count on a rising tide to lift all prices. A company in a good industry isn’t necessarily a good stock. Do your homework.
Professional investors follow myriad sleuthing methods, from computerized screening programs to gumshoe field work. Check out the American Association of Individual Investors, which features several dozen screening programs. For both custom and ready-made screens, try Morningstar and Zacks.
Check out the quote pages on MarketWatch for stocks you are researching. (Here’s the quote page for Apple.) You’ll be able to look at charts, the company profile, news about the company, see financials and SEC filings, learn what insiders are doing and see what the analysts say.
Here are two buying tips from the pros:
Compare a stock’s price to its expected earnings-growth rate. The price-to-earnings-growth ratio, or “PEG,” should be at or close to 1.0.
For example, a stock at 30 times earnings might seem overpriced if the average company in the industry commands a price-to-earnings ratio, or “P/E,” of 20. But if analysts expect 30% earnings growth for the company over the next year, a PEG ratio of 1.0 is eye-catching.
“It’s the biggest metric we look at,” said Alec Young, a global equity strategist at Standard & Poor’s. “A company may have a high P/E, but, until you know what the earnings growth is, it’s hard to ascertain whether the stock is attractive or not.”
Also, study the corporate balance sheet, a financial summary that — along with the cash-flow and income statements — reflects the quality of earnings. These documents tell you whether management makes, spends and invests shareholders’ money wisely. Company websites should post 10-Q quarterly reports and 10-K annual reports, or the Securities and Exchange Commission website offers these and other informative disclosures.
What to WATCH OUT for
Overpriced goods: Cost matters. Purchase price, more than the selling price, determines return on investment. Be cautious about highfliers that may be closer to the end of their runs than the beginning. That sports drink you can’t get enough of, for instance; the market probably knows it’s a top seller and has bid up the stock accordingly.
You could invest in the best company, but if you’re overpaying for it, you could end up losing money because the stock price already reflects the reason you’re buying the stock.
Hunches and headlines: Good companies aren’t always good stocks, and basing decisions on hunches and headlines is not an investment strategy. Don’t make investment decisions solely on one or two sentences of hype. Relying on unsubstantiated claims, rumors and online tips — or your next-door neighbor — is a mistake.
Leave impulse buying for the supermarket and out of the stock market. Have patience. Time gives individuals a rare edge over short-term-minded institutions and hedge funds, which tend to trade frequently. Longer investment horizons smooth the ride down Wall Street and make market losses less likely.
‘Pump and dump’ scams: As the old saying goes: Look around the poker table; if you can’t see the patsy — you’re it. With stocks, the players at the table are internet chat rooms and bulletin boards, spam email, investment newsletters, and even television and radio.
Whatever the delivery method, the classic “pump-and-dump” contains the same message: Buy this stock now, before everyone learns about the firm’s newest widget. The stock usually is thinly traded on the less-policed over-the-counter market, also called the Pink Sheets.
If you and others like you buy into such a pitch, your demand will only boost the stock price, turning a tidy profit for those who bought in earlier than you — often the very folks pumping the stock — who then sell, tanking the shares and leaving newcomers with big losses.
Don’t take the bait. It’s tough to be skeptical when you’re told what you want to hear, but doing otherwise puts you at risk of being separated from your money by fraudulent promoters.
Love-struck stocks: Falling in love with a stock can bring reward, satisfaction and visions of a long-term relationship. Trouble is, a stock won’t love you back. If shares head south, you have to be ready to break it off and sell.
Stay disciplined and diversified. Have a philosophy that you stick to that can be easily replicated and consistently applied. Don’t waver.
And it’s not just about one stock. Many successful investors recommend having about 20 to 25 stocks in a personal portfolio. It doesn’t matter how well you think you know a company. Anything can happen.
Climbing on bandwagons: Many people buy stocks but aren’t stock investors. They want the Next Big Thing — the stock that will make them both rich and smart. In fact, the next Microsoft MSFT, +0.06% or Google GOOG, +0.87% is out there; it’s just unlikely you’ll find it first.
Instead, do these things:
- Buy into companies with a history of superior earnings
- Buy into companies with barriers to entry so they can continue to earn superior returns
- Buy into companies with a track record of making wise capital-reinvestment decisions
Here’s a great way to get started trading stocks:
Check out the Virtual Stock Exchange game from MarketWatch. You can trade stocks in real time using your virtual portfolio, talk strategies with others in the discussion groups for your game, create a customized public or private game for others to play and choose a custom list of symbols to trade in your game.