How To Buy Stocks? A Beginner’s Guide Into the Trading Scene

Introduction

Stocks give you a chance to own a section of a company and also benefit from the appreciation of the asset’s value and potential dividends. Do you want to enjoy these perks but don’t know how to buy stocks? The purchase process is simple and often entails identifying and opening an account with a reputable broker, as well as choosing the ideal stock option.  

Highlights and Key Takeaways

• Stocks represent an investor’s ownership of a fraction of a company.

• Stocks can be traded through exchanges or over-the-counter (OTC) markets.

• Traders should perform thorough research before purchasing stocks.

Understanding Stocks and the Stock Market

What Are Stocks?

Could you be wondering, “What are stocks?“ A stock is a financial instrument representing the ownership of a part of a company, including its revenues and assets. Individuals or businesses that purchase stocks are known as stockholders and are considered partial company owners.

• Shares are the amount of stocks a person or business owns, specifying their ownership stake in a company. 

• Suppose company A has issued stock, and you buy 20 shares. If every share represents 1% of ownership, then you have a 20% stake in the organization. The shares you own also entitle you to profits equivalent to the units of stock you own.

• Equity is the extent of residual ownership in a company after deducting all its debts. Equity is computed by subtracting an organization’s total liabilities from its assets.

• Owning equity gives you the right to vote on a firm’s actions and even elect the board of directors.

• Security is a financial instrument that has monetary value. Examples include stocks, bonds, investment contracts, rights to ownership (e.g., options), limited partnership interests, etc.

• Stocks represent ownership of a business, including all of its resources and earnings. Those who buy stocks are referred to as shareholders because they have a portion of the ownership. A person’s ownership position in the company is defined by their shares, which may or may not correspond to a specific percentage.

How Does the Stock Market Work?

The stock market is where individual and institutional investors buy and sell shares of stock. Every time you purchase a share in this platform, you acquire it from the current shareholder, not the company. Similarly, when you sell a share, you transfer ownership to another investor on the exchange, not the firm.

• The trading occurs electronically via stock exchanges, such as the New York Stock Exchange (NYSE) and the London Stock Exchange. Here, companies list their stock shares via a process known as an initial public offering (IPO).

• Investors then purchase and sell those shares among themselves.

• It’s worth noting that the stock market also features over-the-counter (OTC) marketplaces where investors trade stocks directly without relying on a third party like an exchange.

• The price of a stock is determined by demand and supply dynamics. If the demand for a stock rises, investors will purchase shares faster than sellers want to get rid of them, pushing its price higher.

• On the contrary, if the number of investors selling a stock increases, its market price will likely decrease.

The stock market helps economies to operate smoothly. It achieves this by distributing resources and creating liquidity for individuals and businesses. Supply and demand interact to influence stock prices. Prices typically grow as more investors purchase when demand rises, and vice versa when selling increases. The stock market is essential to economies because it distributes resources, offers liquidity, and links investors’ excess money to those in need.

Preparing to Buy Stocks

Budgeting for Stock Investments

A budget helps you set a specific amount aside for investing and covering associated fees. As such, it ensures you only invest the money you can afford to lose, preventing financial strain in case the market becomes volatile.

• When you set a budget, it’s easier to apportion money wisely, balancing the potential for returns with risk tolerance. This protects you against emotional decision-making when the market fluctuates and ensures you don’t overstretch your financial resources.

• It’s important to consider your income while creating a budget. How much money is left after you have paid your non-negotiable expenses? Use part of this to budget for investments.

• Furthermore, align your budget with your investment goals.

Building a Diverse Portfolio

Diversification focuses on spreading your investments across different asset classes, industries, and regions to reduce your exposure to any single risk. The idea behind this approach is that a portfolio featuring different asset types will, on average, generate better returns and lower risk in the long run.

• As you prepare to invest, keep in mind that the market experiences different conditions that may positively or negatively affect stock prices.

• A diversified portfolio improves your potential to have steady returns over the long term, even amid market volatility.

• It protects you against unanticipated economic or industry-specific challenges, leading to a more resilient and balanced investment approach.

• Warren Buffet’s portfolio perfectly demonstrates an example, that might not suit all investors, how a diversified portfolio can help protect and grow your investments.

• He has spread his investments of shares across different sectors, including Apple, American Express, Bank of America, Chevron, and more.

• This strategy has enabled Warren to grow his investments to billions of dollars over the years, making him one of the most successful investors in the stock markets.

Steps to Buy Stocks

Choosing the Right Brokerage

Do you want to know where to buy stocks? The answer lies in identifying the right broker. There are different types of brokers, including online, discount, and full-service brokers. Online stockbrokers allow you to purchase stocks through a website within minutes. Make sure the broker’s user-friendly interface and reasonable costs fit your budget before choosing one.

• Full-service brokerage firms offer customers a wide range of services, including advice and research, financial planning, tax tips, and more at a price, making their commission rates high.

• Discount brokers don’t provide investment advice as full-service ones, so they conduct buy and sell orders at lower commission rates.

• When selecting a broker, consider the user-friendliness of their interface. It should be easy to navigate. Also, check the amount of fees they charge. Can you afford to pay without compromising your financial standing?

• What investment options are available? This is another factor you need to take into account. Ensure that the investment options provided are the ones you are interested in.

Setting Up Your Trading Account

After deciding on the type of brokerage firm to work with, the next thing is to set up a trading account. The process is simple and involves the following steps:

• Step 1: Visit the official website of your preferred brokerage firm and search for the “open account” icon or something similar.

• Step 2: Select the account type you wish to open—individual account, taxable brokerage account, individual retirement account (IRA), or others.

• Step 3: Provide personal details, including your name, birth date, address, social security number, nature of employment, etc.

• Step 4: Provide proof of identification by submitting the requested documents (e.g., bank statement, photo ID). This helps brokers adhere to the “Know your client” (KYC) regulations, which intend to avert money laundering and identity theft.

• Step 5: Create login credentials to access the brokerage platform.

• Step 6: Deposit money into your account. The easiest way is to link your new brokerage account to your bank account, though some brokers may accept checks or wire transfers.

Recall that features and account settings vary throughout brokerages. Explore the platform and adjust the settings to suit your needs. However, it’s important to learn about the risks involved, evaluate several brokers, and think about security precautions to protect your account before you start trading.

Researching Stocks to Buy

Do your own research before buying stocks. This will enable you to make an informed decision and have a higher probability of success in this market. A good place to begin is to research firms you already know from your experience as a consumer. It’s also a good idea to focus on organizations you desire to become a part owner, not because you wish the stock value to rise.

• Check and analyze the companies’ annual reports. Focus on management’s annual letter to shareholders, as it will give you an overview of what’s happening with the business. The report also features financial statements, highlighting the performance of the company.

• Take advantage of the information and analytical tools available on your broker’s website to assess a company. These resources include, but are not limited to, conference call transcripts, SEC filings, and quarterly earnings updates.

• Remember to evaluate a company’s competitive position within its industry and how it sets itself apart from competitors.

Placing a Trade

Once you log into your brokerage account, find the trading platform and utilize the search function to locate the specific stock you desire to trade. It’s important to note that stock purchases have different order types. The order you select indicates the conditions your broker must follow to execute a transaction.

A wise rule of thumb is to never purchase a stock when the price is too high on a technical level, instead, look for favorable levels at which to enter a position, and never make a purchase based solely on the advice of another person or media. 

• A market order, for example, obligates your broker to purchase the stock immediately at the best available price. This may be the ideal order type if you are a buy-and-hold investor.

• On the other hand, a limit order highlights the maximum price at which your broker should buy a stock.

• Let’s say that a stock is currently trading for $15.50 per share, and you only want to purchase it only when the value is below $15, so you put a limit order. The broker will initiate a trade only if the stock’s price is less than $15.

• The stop order option is also available, and it helps protect against losses arising from the decline of a stock’s value.

• After choosing the order type, provide the trade details. These can include the units of shares you wish to purchase or sell and other relevant details.

• You can then submit your trade after confirming the order details.

After Buying Stocks

Monitoring Your Investments

Reviewing the performance of your stocks regularly is key to maintaining a healthy investment portfolio. So, follow stock-related news and track market trends to remain updated on the same. 

• Monitoring a company’s metrics, including its financial statements, credit rating, and any specific developments that can affect buyers or investments, is a good idea, too.

• Are the market and economic conditions changing? Being able to note these shifts allows you to adjust your investment strategy accordingly.

• Regular reviews can assist you in determining how different assets are performing compared to others. This may guide how to rebalance your portfolio to preserve your desired risk-return profile.

• Avoid panicking over short-term price movements. When you habitually follow up on your investments, you’ll realize that such price shifts may not be a reason for concern.

• Therefore, don’t get involved in panic selling when a downturn occurs, as this could destroy your overall investment strategy.

When to Sell Stocks

Knowing the right time to sell stocks is very important. If you sell stocks prematurely and the stock value goes up, you lose an opportunity to increase your profits. You risk making significant losses if you sell too late and the stock price dips.

• The ideal time to sell stocks is when something fundamental about an organization or its stock changes. An example is when the company’s shares fall constantly, maybe because a competitor is providing a superior product at a reduced price.

• Consider selling stocks when you hit your price target or investment goals to lock in a solid profit.

• If the stocks become overvalued, it’s a good time to sell. This helps mitigate the risk of a possible market correction.

• You may sell stocks when better investment opportunities arise to get the most benefit and minimize costs.

Technical analysis: This method entails examining market trends, patterns, and stock charts. To determine whether a stock is overbought (too high) or oversold (too low), some traders utilise indicators such as moving averages, the relative strength index (RSI), or the moving average convergence divergence (MACD) indicator. Technical analysis-based selling frequently concentrates on past trends and price movements.

Fundamental Side: Things get a little more in-depth here. This includes examining the company’s competitive position, development potential, management, financial standing, and general industry trends. A firm may be a strong candidate for sale if a significant change occurs, such as the introduction of a new product, a change in the company’s leadership, or an impact on the business from the market.

For every investor, there may be a different best time to sell. Some people may pay great attention to technical indicators and sell when certain patterns point to a decline. Others may closely monitor the company’s performance and sell if the company’s climate impairs its prospects for growth.

It’s imperative to combine the two strategies. For example, the case for selling a stock could be strengthened if technical signals indicate that it is overbought and the fundamental side indicates that the company is losing market share.

Conclusion

Buying stocks can be a great way to generate extra income because their values often fluctuate, enabling you to earn profits when the market dynamics change to your advantage. But before you buy stocks, exercise due diligence to find the right brokerage firm and know when to sell.

Take time to learn more about the stock market to avoid making small mistakes that could cost you money. Consider speaking with a financial advisor because they can teach you how to buy stocks more effectively. Moreover, trade with a regulated broker to ensure you adhere to industry guidelines.

FAQ

How Do I Buy Shares for the First Time?

The best way to buy shares for the first time is through brokerage firms. Consider using the services of full-service brokers to get tips on the best investment options.

How to Buy Stock for Beginners?

Select a stock brokerage firm, open an account with them, and fund it. Then, research stocks and choose those that correspond to your goals. Remember to indicate the order type before submitting your buy order.