Do you want to trade stocks but aren’t sure how to start? Although it can seem complicated, buying and selling stocks is far more straightforward than many people realize.
Our complete guide breaks stock trading down into five simple steps. You’ll learn how to set goals, identify a company, buy a stock, maximize your investment, and more.
Let’s get started!
Stocks Explained
Stocks are an investment in a company. When you buy a stock, you become a part-owner in that company. As a partial owner, if the company does well, so do you.
(Technically, you purchase shares in a company’s stock. However, the terms “share” and “stock” are usually considered interchangeable.)
There are two ways to make money from a stock you own:
- Share price increases
- Quarterly dividend payments
Each has benefits depending on your goals.
Share Price Increases
If the stock’s value increases beyond what you paid for it, you can sell it and make a profit. You can sell relatively soon after purchasing a stock, making money, and moving on to other stocks.
You can also hold onto your stocks for a long time and continue earning on your investment. For example, you can invest $1,000 initially and then add $100 each month. Assuming an annual return of 10%, in 10 years, you’d have spent $20,000 on stock worth over $75,000.
Dividends
You don’t have to sell stock to make money. Companies issue quarterly payments, called dividends, to shareholders. Dividend investing is when you earn money passively through stocks. It’s often a great way to achieve long-term financial goals, such as saving for retirement.
Make your dividends work for you more efficiently with a DRIP, short for Dividend Reinvestment Program. Dividends you earn from stock will automatically get utilized to purchase more shares. If dividends aren’t enough to purchase a full share, you can purchase fractions of a share, which allows you to continue investing in the company.
Why Stock Prices Change in Value
Here’s an important tip for all beginning investors:
A company’s performance doesn’t directly affect the price of its stock. Instead, investor perception determines the stock price.
Individuals, corporations, and even governments all buy and sell stocks. Specific goals vary but, on a basic level, everyone who invests in stocks does so to make money. The best way to make money on stocks is buying when the price is low and selling when it’s high.
When a company performs well, confidence in the company’s future increases. If a company seems to consistently perform well, it makes sense to buy stocks now in anticipation of them increasing in value soon.
Likewise, if a company doesn’t meet projections, you have two options. You can sell the stock quickly before it loses even more value. You can also hold onto it and hope the company’s future improves, causing the price to go back up.
Step 1: Choose a Broker
Purchasing individual stocks is fairly easy for anyone, even for beginners. You have options:
- Online Brokers
- Full-Service Brokers
Each method has pros and cons, with some being better for new investors.
Online Brokers
Also called discount brokers, an online broker is usually the best option for most individuals looking for an easy and safe way to invest. Opening an account is simple, typically only requiring the following:
- You fill out a basic account application.
- You provide proof of identification, such as an image of your driver’s license.
- You connect your account to a bank account or choose the option to receive paper checks.
Opening a brokerage account usually requires no fee or even an initial deposit. You can open as many different accounts as you wish. After creating an account, the online broker now acts as an intermediary between you and the companies selling stock.
There’s no shortage of online brokers available. You’ve likely heard of many popular ones:
All offer free account creation, so you can sign up and check out the features and layout with no risk.
Benefits of Online Brokers
Beginners are the target market here. The platforms are easy to navigate and use. Plus, most online brokerage firms keep their trading fees reasonable.
Drawbacks of Online Brokers
While they typically offer technical support related to the platform’s use, you’re on your own as far as investing. They won’t provide personal financial advice. You’ll need to hire a separate financial adviser if you want someone to advise you on how to make trades.
Full-Service Broker
A full-service broker provides the highest level of personal service. The individual or company will not only facilitate trades but also help manage your entire financial portfolio.
Benefits of Full-Service Brokers
When you hire a full-service broker, you get a professional money manager who is personally looking out for your best interests. You can outline your specific goals, such as setting up a college or retirement fund.
Drawbacks of Full-Service Brokers
As you’d expect, a full-service broker is more expensive than the online type. They charge higher fees, service charges, and commissions.
Additionally, you don’t have as much control over your investments. If the idea of researching companies and picking stocks yourself sounds like fun, you shouldn’t use a full-service broker. After all, you should only pay for a broker’s advice if you plan to take it.
Step 2. Research Stocks
You’ve picked an online broker. After creating your account, your next step is selecting stocks to buy.
Choose a Company
You’ll find no shortage of information on any company with stock to sell. While charts and data provide valuable insight, they’re usually a bit overwhelming for the new investor.
Let’s keep it simple: When investing for the first time, choose companies you know a bit about, such as a store you visit or an industry you understand. It’s easier to learn about stocks when you don’t have to learn about a company or industry at the same time.
Research the Company
Next, take a closer look. Don’t worry if you’re not a business wiz. Basic research is easy enough for anyone to handle. Focus on these areas:
Annual letter – A company’s leadership sends shareholders an annual letter covering all major issues. They’re readily available for anyone to read. For instance, Berkshire Hathaway’s annual letters are immensely popular.
Conference call transcripts – Companies hold Earnings Conference Calls on a regular basis, where they relay info to shareholders, financial analysts, and other relevant parties. Like with annual letters, you can find many transcripts of these calls online, including often on the company’s website.
SEC Filings – All publicly-traded companies must file reports, financial statements, and other important info with the US Securities and Exchange Commission. All information is free and searchable through the SEC’s EDGAR database.
Recent News – Stay up-to-date on all the latest news related to your stocks. Follow news about any companies you own stock in, and pay attention to their competitors and industry.
Check out what research options your online broker offers. Many offer easy access to a variety of information. Remember, with these first trades, you’re not only researching stocks, but you’re also learning the features of the online broker platform.
Follow the Market
Generally, when people refer to the “stock market,” they’re talking about these three major indices:
- Dow Jones Industrial Average – The Dow charts the performance of 30 large companies
- S&P 500 – The S&P measures the performance of 500 large companies
- NASDAQ – The NASDAQ follows over 3,300 stocks, including many from the New York Stock Exchange
They can all give you a general picture of the health of the marker. While you always want to keep your long-term financial goals in mind, following the stock market can help you determine when to buy and sell your stocks.
Step 3: Plan the Size of Your Purchase
Start small. Think of your early purchases as a teaching tool, so don’t make any serious investments just yet. Many people buy a single share at first.
You can also buy what’s called a fraction share. Offered by many online brokers, it allows you to buy a portion of a single share. Some of the most expensive stocks in the world, such Berkshire Hathaway, cost hundreds of thousands per share. A fraction share allows you to enjoy some benefits of these powerhouse stocks with a lower barrier to entry.
Most online brokers offer dollar-to-share conversion. For instance, suppose you want to invest $200 in a specific company. The conversion tool shows you the number of shares you can buy.
Step 4: Choose Your Stock Order Type
Buying your first stock will almost certainly seem confusing. The order page will have lots of abbreviations, terminologies, numbers, and symbols.
Fortunately, you don’t need to know most of it to trade. Let’s focus on the two most common order types:
- Market Orders
- Limit Orders
Both have benefits for the first-time trader.
Market Orders
A market order is when you request to buy shares as soon as possible. You’re not particularly concerned with the specific cost. Instead, when you place a market order, you signal your willingness to buy at the current market price.
Market orders work best for buying large, steady stocks that don’t fluctuate wildly in price. Instead, it’s ideal for buy-and-hold investors interested in the long-term value of the stock.
When placing a market order using an online breaker, check for any disclaimers. Some brokers bundle all trade requests and then execute them at a specific time. You might not buy the stocks as quickly as you’d planned.
Limit Orders
A limit order lets you set a price point for purchase. For example, a stock you want is currently trading at $100 a share. After doing some research, you feel $80 is a better price point. You can set a limit order to automatically buy when the shares reach $80. You can also set a limit order for selling shares using the same principle.
However, placing a limit order has no guarantee you’ll wind up with exactly what you want. Instead, execution occurs after the market orders it. Additionally, executions can occur automatically over several days. That can cause transaction costs to increase substantially.
As long as your limit order is open, you can place certain additional orders on it:
- All or None (AON) – The trade executes when the full number you want to buy is available.
- Good for Day (GFD) – The limit order expires at the end of the trading day.
- Good till Canceled (GTC) – The order remains open between 60 to 120 days until it expires or the buyer cancels.
Step 5: Expand Your Financial Portfolio
Investing in the stock market is fun, exciting, and potentially profitable. But, it’s far from the only way to make your money work for you. As you feel comfortable buying and selling stocks, consider other investment options. Popular examples include:
- Mutual Funds – These professionally-curated funds pool money from multiple parties to invest in a safe, broad selection of stocks or stocks and bonds. They grow reliably and have several tax-friendly benefits.
- Retirement Funds – An Individual Retirement Account is a simple way to save for retirement designed to minimize taxes.
Stocks can play an important role in your financial future, but you also want to diversify. Diversification helps you prepare for different life events, such as retirement, while also minimizing risk.
FAQ
Every investor starts somewhere! Check out answers to the most common questions about buying stocks:
What Do I Need to Buy Stocks?
You don’t need much at all. Creating an online brokerage account costs nothing. You only need confirmation of your identity and an optional connection to your bank account.
What are the Best Stocks to Buy?
The best stocks to buy to fit your specific financial goals, such as whether you’re looking for a quick profit or long-term growth.
Beginners should stick to Blue Chip stocks. They’re large, stable businesses such as Johnson & Johnson and Berkshire Hathaway.
What if a Single Share is Too Expensive?
Many Blue Chip stocks cost several hundred or even several thousand dollars per share. In the case of Berkshire Hathaway, a single share is several hundred dollars!
Fraction shares allow you to purchase a portion of a single share. You can reap the financial benefits of stocks that grow consistently but on a more modest scale.
What is a DRIP?
Dividends are quarterly or annual payments that companies make to shareholders. A Dividend Reinvestment plan uses that money to automatically purchase more stock.
When Should I Buy Stocks?
Are you looking towards long-term growth? If you plan to hold onto your stocks for at least five years, then the time to buy is now. Even if the stock takes a nosedive, you’ll still have enough time for the stock value to climb so you can make up for the temporary loss.
What is the Difference between a Stock and a Share?
Generally, they mean the same thing. You can use them interchangeably without sounding like a total newbie.
If you want to get specific, a “share” refers to the size of the equity stake, and “stock” refers to the total profile. For example, you can own stock in Apple, Alphabet, and Chipotle, as well as 50 shares of Chipotle.
Glossary
Don’t feel daunted by the terminology. Terms used in the financial world can seem complex, but they typically represent relatively simple concepts.
- Ask – The price the current owners of the stock will accept for sale.
- Bid – The price buyers will pay to own the stock
- Bear Market – A period when the market trends downward with falling stock prices.
- Bull Market – The opposite of a Bear Market, when the market shows sustained growth. Note that individual stocks can also be bullish or bearish.
- Broker – An individual or organization that buys or sells the stock for you in exchange for a fee or commission.
- Blue Chip Stock – Originally a poker term, it refers to large, stable companies with a history of solid performance on the Dow Jones, S&P, or NASDAQ.
- Cap – A stock’s cap is its market capitalization, which is the total outstanding shares multiplied by the current share price. (A company with a million shares at $20 each has a cap of $20 million.)
- Day Trading – A type of trading where you buy and sell on the same day.
- Dividend – A portion of earnings paid to shareholders on either a quarterly or annual basis. Not all companies pay dividends.
- Split – A company can increase its total shares by splitting current shares in a two-to-one ratio. Splits help encourage smaller investors to buy. For example, if you had 100 shares at $50 each, after a split, you’d have 200 shares each worth $25.
- Spread – The difference between the lowest ask and the highest bid.
- Stop-Loss Order – A stop-loss order automatically fills an entire order when shares hit a specific price.
Conclusion
Don’t feel intimidated by the stock market! With an online broker and a small amount of money, you can quickly learn the basics and start making trades today. The sooner you start, the sooner you can make your financial dreams a reality.