How to Buy Stocks

Buying a stock — especially that first time you become a bona fide part owner of a business — deserves its own celebratory ritual.

But before we pick out shareholder party hats and rent a ticker tape confetti cannon, let’s review the specific steps for how to buy stocks.

Step 1: Understand your options for buying stock

Wondering where to buy stocks? Movies love to show frenzied traders shouting orders on the floor of the New York Stock Exchange, but these days very few stock trades happen this way. Today, there are generally three ways to buy stock: through a full-service stockbroker, through an online broker and directly through the company that is issuing the stock.

Full-service stockbrokers offer exactly what their name implies — full service. These brokers will guide you through the process of selecting stocks, make stock recommendations and place orders on your behalf. The downside: You’ll pay hefty fees for their services, and those costs can quickly erode your investment returns.

To cut costs, you can buy stocks yourself. Buying stock directly from the company is less expensive than a full-service broker, but you’ll have to go to each company you’d like to invest in separately — and not all companies sell their stock directly to investors.

For most people, the best and easiest option is to buy stocks online through an online stockbroker. An online broker offers low costs and the ability to buy stocks from virtually any public company in the U.S.

Step 2: Open an online brokerage account

Opening a brokerage account with an online broker is as easy as setting up a bank account: You complete an account application, provide proof of identification and choose how you want to fund the account. You may fund your account by mailing a check or transferring funds electronically. (We have a step-by-step guide to opening a brokerage account here.)

How do you find a broker that’s worthy of your dough? It’s not just about finding the one with the cheapest trading commissions. Some other things to consider when opening an account to buy stocks:

  • How much money you have. Many online brokers have a $0 minimum requirement to set up a traditional individual retirement account or Roth IRA. For a regular brokerage account, the minimums can range from $0 to $2,000 or more.
  • How frequently you plan to trade. At most brokers suitable for new investors, online stock trading commissions run between $5 and $10. Low commission costs will be more important to active traders, those who place 10 or more trades per month. (Learn more about the ins and outs of stock trading.) Infrequent traders should steer clear of brokers that charge inactivity fees.
  • How much support you want. Online brokers won’t help guide your investment decisions, but they should offer robust customer service and tools. Consider the broker’s offerings of educational tools, investment and stock-trading research and access to real live humans via phone, email, online chat or branch offices.

Step 3: Select the stocks you want to buy

Once you’ve set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experiences as a consumer.

Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You’re looking for companies of which you want to become a part owner.

Warren Buffett famously said, “Buy into a company because you want to own it, not because you want the stock to go up.” He’s done pretty well for himself by following that rule.

Start with the company’s annual report — specifically management’s annual letter to shareholders. The letter will give you a general narrative of what’s happening with the business and provide context for the numbers in the report.

After that, most of the information and analytical tools that you need to evaluate the business will be available on your broker’s website, such as SEC filings, conference call transcripts, quarterly earnings updates and recent news. Most online brokers also provide tutorials on how to use their tools and even basic seminars on how to pick stocks.

To learn more about evaluating companies for your portfolio, see NerdWallet’s feature on how to research stocks.

Step 4: Decide how many shares to buy

You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with a stock all at once. Consider starting small — really small — by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master the shareholder swagger.

Step 5: Choose your stock order type

Don’t be put off by all those numbers and nonsensical word combinations on your broker’s online order page. Refer to this cheat sheet

limit orders.

MARKET ORDERS

With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. Because a market order puts no price parameters on the trade, your order will be executed immediately and fully filled, unless you’re trying to buy a million shares and attempt a takeover coup.

Don’t be surprised if the price you pay — or receive, if you’re selling — is not the exact price you were quoted just seconds before. Bid and ask prices fluctuate constantly throughout the day. That’s why a market order is best used when buying stocks that don’t experience wide price swings — large, steady blue-chip stocks as opposed to smaller, more volatile companies.

Good to know:

  • A market order is best for buy-and-hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.
  • If you place a market order trade “after hours,” when the markets have closed for the day, your order will be placed at the prevailing price when the exchanges next open for trading.
  • Check your broker’s trade execution disclaimer. Some low-cost brokers bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or a specific time or day of the week.

LIMIT ORDERS

A limit order gives you more control over the price at which your trade is executed. If XYZ stock is trading at $100 a share and you think a $95 per-share price is more in line with how you value the company, your limit order tells your broker to hold tight and execute your order only when the ask price drops to that level. On the selling side, a limit order tells your broker to part with the shares once the bid rises to the level you set.

Limit orders are a good tool for investors buying and selling smaller company stocks, which tend to experience wider spreads, depending on investor activity. They’re also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment.

There are additional conditions you can place on a limit order to control how long the order will remain open. An “all or none” (AON) order will be executed only when all the shares you wish to trade are available at your price limit. A “good for day” (GFD) order will expire at the end of the trading day, even if the order has not been fully filled. A “good till canceled” (GTC) order remains in play until the customer pulls the plug or the order expires; that’s anywhere from 60 to 120 days or more.

Good to know:

  • While a limit order guarantees the price you’ll get if the order is executed, there’s no guarantee that the order will be filled fully, partially or even at all. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade.
  • Limit orders can cost investors more in commissions than market orders. A limit order that can’t be executed in full at one time or during a single trading day may continue to be filled over subsequent days, with transaction costs charged each day a trade is made. If the stock never reaches the level of your limit order by the time it expires, the trade will not be executed.

We hope your first stock purchase marks the beginning of a lifelong journey of successful investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them. What you can do is:

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