How to Buy Stocks: A Basic Introduction

Quick answer: How to Buy Stock

• Open a brokerage account online or through a financial institution.
• Fund your account with money from your bank account.
• Research individual stocks or consider diversified options like ETFs and mutual funds.
• Decide how much you want to invest and what type of order to place (market or limit).
• Place your order through your brokerage platform.
• Monitor your investments and rebalance as needed.

Who this is for

• Individuals looking to start investing in the stock market for the first time.
• Those who want to understand the fundamental steps involved in purchasing company shares.
• People seeking to grow their wealth over the long term through equity investments.

What to check first (before you act)

Your Investment Goals and Timeline

Before buying any stock, clarify what you aim to achieve. Are you saving for retirement decades away, a down payment in five years, or something else? Your goals and how soon you need the money will heavily influence your investment strategy and risk tolerance. For example, a long-term goal allows for more potential risk and growth, while a short-term goal might necessitate a more conservative approach.

Your Current Cash Flow

Understand where your money is going each month. Do you have a consistent surplus after covering your essential expenses and discretionary spending? Investing requires available funds, and it’s crucial to ensure you’re not dipping into money needed for immediate bills or unexpected costs. A healthy cash flow indicates you can afford to invest without jeopardizing your financial stability.

Your Emergency Fund or Safety Buffer

Do you have readily accessible savings to cover 3-6 months of living expenses? This emergency fund is critical. Investing money that you might need unexpectedly in the short term can force you to sell stocks at a loss, defeating the purpose of long-term growth. Ensure this buffer is in place before you start investing in the stock market.

Existing Debt and Interest Rates

Evaluate any outstanding debts you have. High-interest debt, such as credit card balances, often carries interest rates far exceeding potential stock market returns. Prioritizing paying off high-interest debt can be a more financially sound “investment” than buying stocks, as it guarantees a return equal to the interest rate saved.

Potential Credit Impact

While buying stocks directly doesn’t typically impact your credit score, how you fund your brokerage account or any margin trading you might consider could have implications. Ensure you understand the terms of your brokerage account and avoid behaviors that could negatively affect your creditworthiness.

Step-by-step: How to Buy Stock

1. Define Your Investment Goals:

• What to do: Clearly state what you want to achieve with your stock investments and over what timeframe.
• What “good” looks like: You have specific, measurable, achievable, relevant, and time-bound (SMART) goals, like “grow my retirement fund by 7% annually over 30 years.”
• Common mistake and how to avoid it: Investing without a clear purpose. Avoid this by writing down your goals and reviewing them regularly.

2. Assess Your Financial Readiness:

• What to do: Confirm you have an emergency fund and your essential expenses are covered.
• What “good” looks like: You have 3-6 months of living expenses saved in a liquid account and your monthly budget is balanced or shows a surplus.
• Common mistake and how to avoid it: Investing money needed for immediate expenses or without an emergency fund. Avoid this by prioritizing your emergency fund and budgeting before investing.

3. Choose a Brokerage Account:

• What to do: Select an online broker or a financial institution that offers investment accounts. Consider factors like fees, available investment options, research tools, and customer service.
• What “good” looks like: You’ve chosen a reputable broker that aligns with your investment style and needs, with low fees and user-friendly platform.
• Common mistake and how to avoid it: Picking a broker solely based on marketing without researching fees or features. Avoid this by comparing several reputable brokers.

4. Fund Your Account:

• What to do: Transfer money from your linked bank account into your new brokerage account.
• What “good” looks like: The funds are available in your brokerage account, ready for investment.
• Common mistake and how to avoid it: Not transferring enough funds to meet minimum investment requirements or to execute trades effectively. Avoid this by checking minimums and transferring a slightly larger amount to be safe.

5. Research Investments:

• What to do: Decide whether to invest in individual stocks, exchange-traded funds (ETFs), or mutual funds. Conduct research on companies or funds that interest you.
• What “good” looks like: You understand what you’re investing in, including the company’s business model, financial health, or the fund’s holdings and strategy.
• Common mistake and how to avoid it: Investing based on hype or tips without understanding the underlying asset. Avoid this by doing your own research or consulting with a financial advisor.

6. Determine Your Investment Amount and Order Type:

• What to do: Decide how much money you want to invest in a specific stock or fund and choose an order type (e.g., market order to buy at the current price, limit order to buy at a specific price or better).
• What “good” looks like: You’ve allocated a specific amount and chosen an order type that suits your risk tolerance and market conditions.
• Common mistake and how to avoid it: Using a market order for a volatile stock or a large purchase, which could result in paying a higher price than expected. Avoid this by using limit orders for more control.

7. Place Your Trade:

• What to do: Enter your chosen stock or fund, the number of shares or dollar amount, and your order type into your brokerage platform.
• What “good” looks like: Your order is successfully submitted and executed by the market.
• Common mistake and how to avoid it: Typos in the stock ticker symbol or share quantity. Avoid this by double-checking all details before confirming the order.

8. Monitor Your Investments:

• What to do: Keep an eye on your portfolio’s performance, but avoid checking it obsessively.
• What “good” looks like: You are aware of how your investments are performing relative to your goals, without making impulsive decisions based on daily fluctuations.
• Common mistake and how to avoid it: Panicking and selling during market downturns or chasing performance by constantly buying and selling. Avoid this by sticking to your long-term plan and rebalancing periodically.

9. Rebalance Periodically:

• What to do: Over time, your asset allocation may drift from your target due to market movements. Rebalancing involves selling some assets that have grown and buying more of those that have lagged to bring your portfolio back to your desired mix.
• What “good” looks like: Your portfolio maintains its intended risk level and aligns with your long-term strategy.
• Common mistake and how to avoid it: Letting your portfolio become too heavily weighted in one asset class without adjustment. Avoid this by scheduling periodic reviews (e.g., annually) for rebalancing.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Investing without an emergency fund	Forced selling at a loss during unexpected financial needs.	Build and maintain a 3-6 month emergency fund in a liquid savings account before investing.
Not understanding what you’re buying	Investing in volatile or unsuitable assets, leading to unexpected losses.	Research companies, ETFs, or mutual funds thoroughly. Understand their business, risks, and fees before investing.
Emotional decision-making (fear/greed)	Buying high during market euphoria and selling low during panics, leading to poor returns.	Stick to a well-defined investment plan. Automate investments and avoid checking your portfolio daily.
Ignoring fees and commissions	High costs can significantly erode your investment returns over time.	Compare brokerage fees, expense ratios for funds, and transaction costs. Choose low-cost options where possible.
Trying to time the market	Missing out on periods of growth and incurring losses due to incorrect timing.	Focus on long-term investing (time in the market) rather than short-term trading (timing the market). Consider dollar-cost averaging.
Investing all money in one stock	High risk; if that company performs poorly, your entire investment is jeopardized.	Diversify your investments across different companies, industries, and asset classes (e.g., using ETFs or mutual funds).
Not rebalancing your portfolio	Portfolio becomes unbalanced, increasing risk beyond your comfort level or missing growth opportunities.	Periodically review your portfolio (e.g., annually) and rebalance to maintain your target asset allocation.
Investing money needed in the short term	May be forced to sell investments at a loss if funds are needed before the market recovers.	Only invest money you can afford to tie up for at least 3-5 years, aligning with your investment horizon.
Over-diversification	Spreading investments too thin can make it difficult to track performance and may dilute potential gains.	Aim for sufficient diversification without becoming overwhelmed. A few broad-market ETFs can provide good diversification.
Not considering taxes	Unforeseen tax liabilities on gains can reduce net returns.	Understand the tax implications of different investment accounts (taxable vs. tax-advantaged) and strategies. Consult a tax professional if unsure.

Decision rules (simple if/then)

• If your primary goal is short-term (under 3 years), then avoid individual stocks and consider high-yield savings accounts or CDs because stock market volatility is too high for short-term needs.
• If you have high-interest debt (e.g., credit cards), then prioritize paying it off before investing because the guaranteed return from debt reduction often exceeds potential stock market gains.
• If you are new to investing and want broad exposure, then consider index ETFs or mutual funds because they offer instant diversification across many companies.
• If you are comfortable with more risk and have done thorough research, then you might consider individual stocks because they offer higher potential growth but also higher risk.
• If you are unsure about which stocks to pick, then use a robo-advisor because they can create and manage a diversified portfolio based on your goals and risk tolerance.
• If you want to invest a fixed amount regularly regardless of market price, then use dollar-cost averaging because it can help reduce risk and smooth out the impact of market volatility.
• If you are investing for retirement (long-term, 10+ years), then you can generally afford to take on more risk because you have time to recover from market downturns.
• If you are investing in a taxable brokerage account, then be mindful of capital gains taxes on profits when you sell because these taxes can reduce your overall return.
• If you are considering using margin (borrowing from your broker to invest), then understand the significant risks involved because losses can exceed your initial investment.
• If your portfolio’s asset allocation drifts significantly from your target, then rebalance by selling overperforming assets and buying underperforming ones because this helps manage risk.
• If you have a very small amount to invest, then look for brokers that offer fractional shares because this allows you to buy portions of expensive stocks.
• If you prefer active management and believe you can pick winning stocks, then consider actively managed mutual funds, but be aware of their typically higher fees.

FAQ

What is a stock?

A stock represents a share of ownership in a publicly traded company. When you buy stock, you become a part-owner of that business.

How much money do I need to start buying stocks?

You can start with very little. Many online brokers allow you to open an account with no minimum deposit and offer fractional shares, meaning you can buy a portion of a stock for as little as a few dollars.

What’s the difference between a stock, an ETF, and a mutual fund?

A stock is ownership in a single company. An ETF (Exchange-Traded Fund) is a basket of stocks (or other assets) that trades like a stock on an exchange. A mutual fund is also a basket of assets, but it typically trades only once per day at its net asset value.

What is a brokerage account?

A brokerage account is an investment account that allows you to buy and sell securities like stocks, bonds, ETFs, and mutual funds. You need one to access the stock market.

What is the difference between a market order and a limit order?

A market order buys or sells a security immediately at the best available current price. A limit order buys or sells a security only at a specific price or better.

Should I buy individual stocks or ETFs/mutual funds?

For beginners, ETFs and mutual funds are often recommended due to their diversification, which spreads risk across many companies. Individual stocks require more research and carry higher risk.

What are dividends?

Dividends are portions of a company’s profits that it distributes to its shareholders, usually on a quarterly basis. Not all companies pay dividends.

How do I make money from stocks?

You can make money through stock appreciation (the price of the stock goes up) and through dividends (payments from the company).

What is diversification?

Diversification is the strategy of spreading your investments across different asset classes, industries, and geographies to reduce risk. It means not putting all your eggs in one basket.

What this page does NOT cover (and where to go next)

• Advanced trading strategies like options or futures.
• Detailed analysis of specific company financial statements.
• Tax-loss harvesting strategies.
• The intricacies of retirement accounts like 401(k)s or IRAs.
• Specific investment recommendations.

Next steps might include researching different types of investment accounts, exploring dividend investing strategies, or learning about portfolio management and rebalancing in more detail.