Stocks play a key role in your investment portfolio, and learning to buy stocks is your first job as an investor. Between 1926 and 2018, a 100% equity portfolio returned an average of 10.1% a year, according to Vanguard, nearly double the return of a bond portfolio during the same period.
here is our step by step guide on how to buy stocks:
1. open an account to buy shares
A brokerage account is the most convenient place to buy stocks, but it’s far from your only option. If you see yourself as a hands-on investor who likes to research companies and learn about the markets, an online brokerage account is a great place to start buying stocks.
Online brokers offer taxable and tax-advantaged accounts. If you want to buy stocks to finance your retirement, consider an individual retirement account (IRA) that offers certain tax advantages, such as tax-deferred investment growth and potential tax credits on your tax return. If you’re investing a day before retirement, or if you’ve already maxed out your retirement accounts, look into a taxable brokerage account. While they don’t offer the tax advantages of IRAs, they also don’t have limitations on how much money you can deposit or when you can withdraw funds.
The online brokerage of your choice may also ask if you want to open a margin account. With a margin account, the brokerage house lends you money to buy stocks. This allows experienced investors to buy more shares with less of their own money for some additional costs and much more risk.
direct share purchase plans
If you’ve already identified the stocks you’d like to buy, you may want to consider a direct stock purchase plan. Not all publicly traded companies participate in direct stock purchase plans, but many of the biggest and most popular names do, and you don’t need a brokerage account to buy stock this way. however, you will most likely be charged additional fees.
Direct purchase plans are almost always run by third parties, rather than the companies themselves. The two most common direct purchase plan managers are ComputerShare and American Stock Transfer & trust company (ast). both firms charge additional fees for direct purchase plans. By contrast, most online brokers charge zero commissions for buying and selling stocks.
drink coke. You can buy a one-time amount of $500 worth of Coca-Cola stock on ComputerShare for a $5.00 fee, or set up at least 10 recurring $50 purchases for a $2.50 fee. Either way, there is a $0.05 processing fee for each share purchased. reinvesting any dividend incurs a charge of 5% of the amount invested up to a maximum of $5. computershare will round up your investment with fractional shares, if necessary.
With the ready availability of free or low fee online brokerage, many direct purchase plans have fallen out of favor. however, they may allow investors to buy shares of a specific company at a slight discount, which can help offset the fees they charge. Please carefully evaluate the benefits of investing using a direct stock purchase plan before making your first purchase.
full service brokerage
Full-service brokers provide wealthy clients with a wide variety of financial services, from retirement planning and tax preparation to estate planning. they can also help you buy stocks. The problem is that full service brokers charge high commissions compared to online brokers.
For wealthy individuals who don’t have a lot of extra time to stay on top of their complicated financial lives, full-service brokers offer special treatment as well as a high level of trust. If all you want to do is buy stocks, a direct purchase plan or online brokerage is a better option.
Roboadvisors are automated investment platforms that assess your financial goals, investment schedule, and risk tolerance. When you sign up for a robo-investor, the platform asks you a series of questions to assess these factors, and then invests your money in a managed exchange-traded fund (ETF) portfolio that suits your needs.
However, the thing about roboinvestors is that you’re not buying stocks directly, you’re buying a portfolio of ETFs. Some of those funds will almost certainly be stock ETFs, such as SPDR S&P 500 ETF Trust (SPY), which strives to match the performance of the S&P 500 stock index. But others could be broad bond funds, such as Vanguard Total Bond Market ETF (BND), which invests in fixed income securities.
That doesn’t make robo-advisors a bad choice for your investment dollars, especially if you’re more of a hands-off investor. just be aware that robo-advisors may not be your first choice if you want to buy stocks.
2. research what stocks you would like to buy
There are thousands of different publicly traded companies offering shares on the market. that makes it daunting to decide which stocks to buy. One way to think about researching the stocks you want to buy is to adopt a well thought out strategy, such as buying growth stocks or buying a portfolio of dividend stocks.
- growth stocks are stocks of companies that make quick and solid gains in earnings or revenue. they tend to be relatively young companies with a lot of room to grow, or companies serving markets with a lot of room to grow. Whether shares of a growth stock seem expensive or not, investing in growth stocks assumes continued rapid growth will deliver strong price gains over time.
- value stocks are shares of stock that are priced at a discount and may see price increases as the market comes to recognize their true value. With value investing, you’re looking for “stocks for sale,” with low price-to-earnings and price-to-book ratios. the goal is to buy stocks that are undervalued and hold them for the long term.
- dividend stockspay part of their earnings to shareholders in the form of dividends. When you buy dividend stocks, the goal is to achieve a steady stream of income from your investments, whether your stock prices are going up or down. Certain sectors, including utilities and telecommunications, are also more likely to pay dividends.
use a stock filter to find stocks to buy
Whatever strategy you choose, finding the stocks you want to buy can still be a challenge. Stock Screeners help you narrow down your list of potential stocks to buy and offer an endless array of filters to weed out all the companies that don’t meet your parameters. Almost all online brokerage accounts offer stock filters, and there are more than a few free versions available online.
With a stock filter, you can filter out small-cap stocks or large-cap stocks or view lists of companies with declining stock prices and stocks that are at all-time highs. they also usually allow you to search for stocks by industry or market sector. filtering by p/e ratio is a great way to find stocks that are overvalued or undervalued.
3. execute trades on your account
Once you’ve opened and funded a brokerage account and then identified the stocks you’d like to buy, it’s time to execute trades on your account. Before you place an order to buy stocks, you need to understand a few details about the process: Buying stocks isn’t as simple as pressing a buy button in an app. Typically, you’ll need to choose an order type, which provides instructions on how you want to buy a stock.
Two of the most common order types you’ll have to choose from:
- Market order. This type of order directs the broker to buy shares immediately at the lowest available price. The current stock price you see when you enter a market order is not necessarily the price at which your market order will be executed: prices change in milliseconds and you are just telling the broker to get the lowest price available.
- limit order. you name your price and the buy is only executed if the stock falls to or below that price within a selected time period. if the stock never reaches the specified price before the limit order expires, your trade is cancelled.
If you have a small balance in your account but the prices of the shares you want to buy are very high, consider fractional shares. Take Google Parent, Alphabet, Inc. as an example: As of the end of September 2020, Alphabet is priced at nearly $1,500 per share. With fractional shares, you could invest as little as a few dollars in stock. A growing number of brokers, including Charles Schwab, Fidelity, and Robinhood, to name a few, sell fractional shares.
4. use the average dollar cost to buy stock over time
The problem with stock markets is that prices fluctuate constantly. You may have your eye on a stock that seems reasonably priced today, but who’s to say whether the price will be higher or lower tomorrow?
Dollar cost averaging provides a solution to this problem: Buy stocks with a fixed amount of money at regular intervals, and you may pay less per share on average over time. More importantly, dollar cost averaging allows you to start buying stocks right away, with a little money, instead of waiting to build up your balance. this mitigates the risk of you buying too high or too low, since you’re spreading your purchases over a long period of time.
Suppose you use dollar cost averaging to buy your target stock at $5 per share in week one, $10 per share in week two, and $9 per share in week three. On average, you’ve paid $8 a share, better than if you hadn’t made your purchase at the right time and bet everything at $10 a share, only to see the price drop. plus, investing the same dollar amount each time would buy you more shares at $5 per share than at any of the other price points.
buy low and sell high is a mantra for successful stock buying that you’ve probably heard more than once. but practicing it can be psychologically challenging, and it can be very, very difficult even for experts to agree on what is “low” and “high” for any given action. Recurring, automated stock purchases using dollar cost averaging help you get around the challenge and make investing routine.
5. think carefully when to sell your shares
The ideal time to sell your stock is when you need the money. Long-term investors should have a strategy focused on a financial goal and a timeline to achieve it. That means you need to include a plan to start leveraging your investments and use the cash you’ve built up when the time is right.
That also means that deciding when you should sell a stock has very little to do with what the stock or the broader markets are doing at any given time. Unless you’re day trading and looking to make a quick profit, which is much riskier than long-term investing, you don’t even have to worry about watching daily price movements.
If you’re wondering whether to hold a losing stock, think again about why you bought it in the first place and decide if anything has fundamentally changed. if not, a drop in price could be a good time to buy more.
taxes on capital gains and sales of shares
If you decide to give your broker the sell order, make sure you understand the tax consequences first. If the stock price has gone up since you first bought it, you may have to pay capital gains taxes. Gains on shares you owned for one year or less are subject to the highest ordinary income tax rate, up to 37%, depending on your income. shares sold after more than a year are taxed at the lower long-term capital gains rate of 0% to 20% in 2020.
If the price has dropped, you can use the loss to offset any gains you’ve made elsewhere in your portfolio. For example, let’s say one of your stocks fell $10 per share. If you own another stock that earned $15 per share, you can sell both shares and owe taxes only on the difference of $5 per share. But beware of the dummy sale rule: once you take advantage of this tax benefit, you won’t be able to repurchase the shares you sold at a loss, or any similar shares, for 30 days.