How to Buy Stocks and Shares

Quick answer

• Open a brokerage account with a registered investment firm.
• Fund your account with money from your bank account.
• Research individual stocks or consider diversified options like ETFs or mutual funds.
• Decide on your investment strategy (e.g., long-term growth, dividend income).
• Place an order for the stocks or funds you wish to purchase.
• Monitor your investments regularly and rebalance as needed.

Who this is for

• Individuals looking to invest their savings for long-term growth.
• Those interested in owning a piece of publicly traded companies.
• Beginners who want to understand the basic process of buying stocks.

What to check first (before you act)

Goal and timeline

Before you buy any stock, clarify what you hope to achieve. Are you saving for retirement in 30 years, a down payment on a house in five years, or something else? Your goal and how much time you have will heavily influence the types of investments you choose and the risks you can afford to take. A longer timeline generally allows for more aggressive investments, while a shorter timeline may call for more conservative options.

Current cash flow

Understand where your money is coming from and where it’s going. Ensure you have a handle on your income, expenses, and savings rate. Investing should generally be done with money you won’t need in the short term. Having a clear picture of your cash flow helps determine how much you can comfortably allocate to investments without jeopardizing your essential financial needs.

Emergency fund or safety buffer

Before investing in the stock market, it’s crucial to have a solid emergency fund. This fund is typically held in a readily accessible savings account and is meant to cover unexpected expenses like job loss, medical emergencies, or major home repairs. Aim for 3-6 months of living expenses, or more if your income is unstable. Investing money that you might need for an emergency can force you to sell your investments at an inopportune time, potentially leading to losses.

Debt and interest rates

Evaluate your current debt obligations. High-interest debt, such as credit card balances, can often be a more pressing financial priority than investing. The interest you pay on debt can easily outweigh potential investment returns. Consider paying down high-interest debt before allocating significant funds to the stock market. For lower-interest debt, like some mortgages or student loans, the decision may depend on your risk tolerance and expected investment returns.

Credit impact

While buying stocks doesn’t directly impact your credit score, your overall financial health does. A responsible approach to investing, including managing debt and having an emergency fund, contributes to a stable financial picture. This stability can indirectly support good credit habits. Conversely, taking on excessive debt to invest or being forced to sell investments due to financial hardship could negatively affect your creditworthiness.

Step-by-step (simple workflow)

1. Define your investment goals:

• What to do: Clearly state what you want to achieve with your investments and your timeframe.
• What “good” looks like: You have specific, measurable, achievable, relevant, and time-bound (SMART) goals. For example, “I want to grow my retirement savings by 7% annually over the next 25 years.”
• Common mistake and how to avoid it: Investing without a goal. Avoid this by writing down your objectives and revisiting them regularly.

2. Assess your financial situation:

• What to do: Review your income, expenses, savings, and existing debts. Ensure you have an adequate emergency fund.
• What “good” looks like: You have a clear understanding of your cash flow and have set aside 3-6 months of living expenses in an accessible account.
• Common mistake and how to avoid it: Investing money needed for immediate expenses or emergencies. Avoid this by prioritizing your emergency fund and high-interest debt repayment first.

3. Choose an investment account type:

• What to do: Decide whether a taxable brokerage account or a tax-advantaged retirement account (like an IRA or 401(k)) is best for your goals.
• What “good” looks like: You’ve selected an account that aligns with your financial goals and offers tax benefits if applicable.
• Common mistake and how to avoid it: Not considering tax implications. Avoid this by researching the tax advantages of different account types.

4. Select a brokerage firm:

• What to do: Research and choose a reputable online brokerage firm or a financial advisor.
• What “good” looks like: You’ve selected a firm with reasonable fees, user-friendly platform, good customer support, and the investment options you need.
• Common mistake and how to avoid it: Choosing a firm solely based on advertising. Avoid this by comparing fees, features, and customer reviews from multiple sources.

5. Open and fund your account:

• What to do: Complete the application process for your chosen brokerage account and link your bank account to transfer funds.
• What “good” looks like: Your account is open, verified, and you’ve transferred the amount you intend to invest.
• Common mistake and how to avoid it: Delaying funding after opening the account. Avoid this by setting a date for funding and sticking to it.

6. Research investment options:

• What to do: Learn about different types of investments, such as individual stocks, exchange-traded funds (ETFs), and mutual funds.
• What “good” looks like: You understand the basic risk and return profiles of various investment vehicles.
• Common mistake and how to avoid it: Investing in something you don’t understand. Avoid this by doing thorough research or consulting with a financial advisor.

7. Develop an investment strategy:

• What to do: Decide on your approach, such as growth investing, value investing, dividend investing, or a diversified passive strategy.
• What “good” looks like: You have a clear plan for what types of assets you will invest in and why.
• Common mistake and how to avoid it: Chasing “hot” stocks or market trends without a strategy. Avoid this by sticking to your pre-defined plan.

8. Place your first trade:

• What to do: Use your brokerage platform to buy the stocks, ETFs, or mutual funds you’ve chosen.
• What “good” looks like: Your order is successfully placed and executed at a price you’re comfortable with.
• Common mistake and how to avoid it: Placing market orders impulsively. Avoid this by understanding order types (limit vs. market) and setting your price limits.

9. Monitor and rebalance your portfolio:

• What to do: Periodically review your investments and adjust your holdings to maintain your desired asset allocation.
• What “good” looks like: Your portfolio remains aligned with your goals and risk tolerance over time.
• Common mistake and how to avoid it: Over-monitoring or reacting emotionally to market fluctuations. Avoid this by setting a schedule for reviews (e.g., quarterly or annually) and sticking to your long-term strategy.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Investing without a clear goal	Lack of direction, impulsive decisions, potential to miss financial targets.	Define SMART investment goals and a timeline. Revisit them regularly.
Not having an emergency fund	Forced selling of investments during market downturns, incurring losses.	Build and maintain an emergency fund covering 3-6 months of living expenses before investing significantly.
Investing borrowed money	High risk of significant debt and potential margin calls if investments fall.	Only invest money you can afford to lose. Avoid using leverage or borrowed funds for speculative investments.
Emotional investing (panic selling)	Selling low during market dips, locking in losses, missing eventual recovery.	Stick to your long-term investment plan. Avoid checking your portfolio daily. Focus on your goals, not short-term market noise.
Chasing past performance	Buying assets after they have already surged, risking a subsequent price drop.	Focus on fundamental value and long-term potential, not just recent gains. Diversify across different asset classes.
Over-diversification (too many holdings)	Diluted returns, difficult to track performance, potentially higher fees.	Concentrate on a few high-conviction investments or use diversified funds like ETFs/mutual funds.
Ignoring fees and expenses	Erodes investment returns over time, significantly impacting long-term growth.	Research and compare fees (management fees, trading commissions, expense ratios) of brokers and investment products.
Not understanding investment products	Investing in complex instruments without fully grasping the risks involved.	Thoroughly research any investment before buying. If it’s too complex, it may not be suitable for you.
Failing to rebalance the portfolio	Portfolio drift, becoming over-exposed to certain asset classes, increasing risk.	Schedule regular portfolio reviews (e.g., annually) to rebalance and realign with your target asset allocation.
Trying to time the market	Missing out on gains while waiting for the “perfect” entry point, often losing.	Invest consistently over time (dollar-cost averaging) rather than trying to predict market tops and bottoms.

Decision rules (simple if/then)

• If you have high-interest debt (e.g., credit cards) then prioritize paying it off before investing significantly because the guaranteed return of avoiding interest often exceeds potential investment gains.
• If your investment goal is more than 10 years away then you can generally afford to take on more risk with growth-oriented investments because you have time to recover from market downturns.
• If your investment goal is less than 5 years away then you should consider more conservative investments like bonds or high-yield savings accounts because preserving capital is more important than maximizing growth.
• If you are new to investing then start with diversified, low-cost index funds or ETFs because they offer broad market exposure and reduce individual stock risk.
• If you are uncomfortable with volatility then consider investments with lower risk profiles, such as dividend-paying stocks or bonds, because they tend to be less susceptible to sharp price swings.
• If you prefer a hands-off approach then consider robo-advisors or target-date funds because they automate portfolio management and rebalancing.
• If you want to invest in specific companies you believe in then research their financials, competitive landscape, and long-term prospects thoroughly before buying individual stocks.
• If you are investing for retirement then prioritize tax-advantaged accounts like IRAs or 401(k)s because they offer significant tax benefits that boost long-term growth.
• If you plan to invest a lump sum then consider dollar-cost averaging (investing smaller amounts over time) to reduce the risk of investing right before a market downturn.
• If you are unsure about your investment strategy then consult with a fee-only financial advisor because they can provide personalized guidance without conflicts of interest.

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.

What is a brokerage account?

A brokerage account is an investment account that allows you to buy and sell securities like stocks, bonds, and ETFs. You open this account with a financial institution called a brokerage firm.

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

A stock is ownership in a single company. An ETF (Exchange-Traded Fund) is a basket of securities (like stocks, bonds, or commodities) that trades on an exchange like a stock. ETFs offer diversification.

How much money do I need to start buying stocks?

Many brokerages allow you to open accounts with no minimum deposit. You can often buy fractional shares, meaning you can invest even small amounts, like $5 or $10, in a single stock.

What are the risks of buying stocks?

The primary risk is that the value of your investment can go down, meaning you could lose money. Company performance, economic conditions, and market sentiment can all affect stock prices.

What is a dividend?

A dividend is a portion of a company’s profits that it distributes to its shareholders, typically on a quarterly basis. Some investors focus on dividend-paying stocks for income.

Should I buy individual stocks or mutual funds/ETFs?

Individual stocks offer the potential for higher returns but also carry higher risk. Mutual funds and ETFs offer instant diversification, which can reduce risk, but may have lower individual growth potential.

What is dollar-cost averaging?

Dollar-cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This helps reduce the risk of buying at a market peak.

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

• Advanced trading strategies (e.g., options, futures, margin trading).
• Specific stock recommendations or market timing advice.
• Detailed analysis of individual company financial statements.
• International investing or cryptocurrency.
• Estate planning related to investment holdings.
• Tax-loss harvesting strategies.