How to Buy Stock If You’re a First-Time Investor

how to buy stock

You’re at a family gathering. Your brother-in-law brags about how much money he made on his latest stock trade. Now you’re intrigued — you want a chance to invest. However, other than contributing your retirement plan at work, you are a beginning investor. Buying a stock seems daunting when you don’t have much experience investing.

The good news is that investing doesn’t have to be difficult. In fact, learning how to buy stock is downright simple when you follow these five steps.

1. Figure out how much you can invest

First of all, you need to know how much you have available to invest. Look at your income and expenses. Decide what you can afford to lose if your investments don’t pan out. You don’t want to go stock picking with money meant for groceries or insurance premiums.

It’s also important to differentiate between money used to invest in retirement — often through mutual funds — and what you put toward individual investments.

“When you get into stock picking, the money you have available for investing should be outside what you’ve got invested through your company plan,” says John Rampton, a long-time investor, entrepreneur, and founder of Due, an invoicing and payments fintech startup.

Rampton also suggests that you make individual investments with what’s left over after you’ve put money toward other goals you have, like saving for a home or adding to your emergency fund.

Don’t forget to determine whether you want to invest a set amount each month or whether you plan to use a lump sum for a one-time purchase. “For many people, it can make sense to invest a small amount each month,” says Rampton. “Unless you have a windfall, chances are you won’t have a big lump sum. Creating an investing plan can help you take advantage of investing without waiting to have a larger amount of capital.”

2. Open a brokerage account

Once you know how much money you plan to invest, it’s time to open a brokerage account. You can open an account quickly and easily in many cases. Many online brokers streamline the process so that it only takes a few minutes.

You will need to provide proof of identity and information for funding. Be prepared by having the following information close at hand as you start the investment account application:

  • Legal name
  • Birthdate
  • Address
  • Phone number
  • Social Security number
  • Employer information
  • Bank account number
  • Bank routing number

It can take a few days to transfer your money into a brokerage account before you can start investing. Some brokers send small test deposits of a few cents to verify your account.

Make sure your broker fits your needs. “When choosing an online broker, choose based on factors like cost, ease of use, and research tools,” says Rampton. “Some brokers, like Robinhood, are free to use but don’t have a lot of research tools. If you are confident that you can research outside the trading app, that might not matter.”

For investors who are interested in having research tools like stock screeners and the latest news available to them, a broker such as E*TRADE can make more sense, says Rampton.

3. Research your stock choices

Now it’s time to do your homework. If your broker offers a stock screener, research can be easier. Just check off your criteria and the broker will present companies that fit the bill.

It’s important to focus on the business, though, and not ticker symbols. You might be interested in that hot stock tip from your brother-in-law, or intrigued by the story your coworker tells of an up-and-coming startup. Before you take their word for it, you want more information. After all, it’s your money on the line.

“Look at the company itself, rather than the hype, or what happened to the stock price in the last week,” says Rampton. “For best results, consider looking at a company’s balance sheet, management, and long-term potential advantage in its market.”

Remember that your stock purchase comes with ownership in the company. As Warren Buffett famously said in a Forbes profile: “Buy into a company because you want to own it, not because you want the stock to go up.”

Consider starting a watchlist of stocks. You don’t have to buy everything on the list, but you can use it to guide you when making decisions about what to consider next. If, upon further research, a stock on your watchlist doesn’t stack up, you can cross it out.

If you go this route, though, you need to be careful. Stock picking and day trading can be dangerous, especially for a beginner. Frequent trading can result in lower long-term returns, and it’s important to include diversity in your portfolio. Often, for beginners, it can make sense to start with an index fund or ETF.

4. Decide how many shares you can buy

Look at the stock price to estimate how many shares you can buy. Don’t forget to factor in the fee.

Say you have $100 to invest and XYZ company costs $50 per share. However, the broker charges $4.95 per trade. You won’t be able to purchase two shares because the cost is $104.95 with the fee — and you only have $100. So, instead of buying two shares, you can only buy one. The remaining $45.05 sits in your account until you add more funds and make another purchase.

In some cases, you might be able to buy partial shares. Maybe it’s possible to buy half-shares of company XYZ. In that case, you can purchase 1.5 shares for $79.95 ($75 plus the $4.95 fee).

No matter how many shares (or partial shares) you can purchase, you probably won’t have to do this math on your own. Many brokers do it for you, showing you how many shares you can purchase when go to place your order.

5. Place your order

Finally, it’s time to place your order. Most brokers take you through how to buy stock intuitively. There’s a good chance you will find something like “Buy” or “Trade” on the navigation bar (or even next to the stock ticker you are researching). Once you click on on the button, you will be taken through your order. Most of the time it’s a matter of pointing and clicking, or choosing from a drop-down menu.

“Buying stock today is easier than ever,” says Rampton. “You can do it on your own, in just a few mouse clicks. Just make sure you do your research ahead of time so you know what you’re buying.”

Some brokers have more advanced options for placing an order, requiring you to choose between a market order and a limit order. Beginners, says Rampton, are most likely to deal in market orders. Here’s what you need to know about market orders and limit orders:

  • Market orders indicate that you’ll buy at the best available price. Your trade happens immediately. However, because stock prices fluctuate constantly, you might not get the exact price you were quoted. For most investors, though, small differences in price don’t matter that much. The important thing is that your order is executed fully.
  • Limit orders allow you to set up the trade to take place when the share price is what you want. However, because of price swings and other conditions, your order might not be filled fully.

Once your order is placed, you can sit back and relax, knowing that you are a bona fide stock investor.

How to buy stock automatically

Many brokers offer automatic investing plans. These plans automatically transfer money from your bank account to the brokerage account each month. Once the money hits the brokerage account, it is invested as you direct.

If you know you want to invest a set amount each month, your broker will automatically buy as many shares as possible at the market price on the day you designate each month. It’s even possible in some cases to divide your money between more than one stock, in proportions you choose.

Once you have an investment plan in place, your portfolio will get bigger without further action on your part — assuming your stocks gain in value. When setting up your automatic investing plan, pay attention to your finances. You want to choose a schedule that coordinates with your income and other bills to avoid overdrafts. And you will also need to monitor your investments to stay on top of the situation.

“Investing is a great way to build wealth over time,” says Rampton. “Set up an automatic plan, get started today, and watch your portfolio grow.”

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