How To Buy a Stock

Want to invest but don't know where to start? Read to learn more about how to pick, buy, and sell a stock.

Stock Buying 101

When you buy a stock, or share of stock, you are essentially buying a portion of a company, entitling you to some ownership and company profits.

To buy a stock, you’ll have to follow a few steps:

1. Open an account
2. Pick stocks
3. Decide how many shares you want to purchase
4. Purchase the shares using a stock order
5. And ultimately, sell the stock

Continue reading to understand these steps in more detail.

How to Start Buying Stocks

Purchasing stocks will generally require a stockbroker. The most common type of stock brokerage is an online/discount broker. Also known as online brokers, discount brokers don’t provide investment advice and act as a platform that takes in stock orders.

Opening account will take minutes online, you can immediately buy and sell stocks, and there is no upfront cost or minimum account balance needed. The only costs you’ll encounter with these brokers are a small fee per transaction, which could be as low as $5 per trade.

With today’s technology, you can even buy and sell stocks on your smartphone. There are so many apps that are cheap or even free options for buying and selling stocks. Among these are Robinhood, M1 Finance, TD Ameritrade, and more.

However, discount brokers won’t provide any stock picking or financial planning advice, so you’ll have to do that research before investing and manage your stocks on your own. If you prefer to have someone manage your investments instead, go for a full service broker.

How Much Money Do I Need?

With today’s technology, you can even buy and sell stocks on your smartphone. There are so many apps that are cheap or even free options for buying and selling stocks. Among these are Robinhood, M1 Finance, TD Ameritrade, and more.

However, discount brokers won’t provide any stock picking or financial planning advice, so you’ll have to do that research before investing and manage your stocks on your own. If you prefer to have someone manage your investments instead, go for a full service broker.

On the other hand, for a full service broker, your minimum account balance generally is around $1000, and with large broker fees on top of that, you are looking at a minimum spend of a couple thousand dollars.

How to Pick Stocks

There are many sites online where you can learn about stock basics, how to value a company, and see different financial statements of public companies, which is important when picking what stocks to buy.

What Factors Should I Focus On?

There are several factors that go into whether a stock is worth buying, including earnings ratios, cash flows, valuation, and recent company news. These all come down to figuring out if a stock is undervalued or “cheap,” or has potential for growth, both of which can lead to rising stock prices that will eventually turn into profit for the stock holder.

Based on your short term and long term goals, risk aversion, and income, the factors you pay attention to may vary.

Deciding How Many Shares to Buy

No minimum – but don’t forget about fees

There is no minimum amount of shares you must purchase when buying stocks, however, considering broker commissions and fees, most people are best off buying a minimum of $500-1000 worth of shares when investing. The fee on one share and up to $500+ worth of shares are generally the same, meaning the more shares you buy, the less your broker fees are per-share.

Fractional shares

There are also some opportunities to buy fractional shares, which are a portion of a share (less than one share) of stock.

How to choose amount of shares

The amount of shares you buy is up to you, and should be based on your research and confidence on the stock, and how you choose to diversify your portfolio, while taking into consideration broker fees.

What are Stock Trade Orders?

Once you pick a stock to buy, the trade can happen in two main ways:

Market Order

In this stock trade order, you are simply buying the stock at the current market price. This order will immediately execute, and your price will be determined at moment of execution. When you sell the stock, the bid you receive will be the stock price at the moment of selling.

Limit Order

This type of stock trade order means your order will only execute once the stock price is a specified value. This means there is no guarantee of a trade ever going through depending on how high or low the specified value is.

When to Sell a Stock

If the price is right

If a stock you bought has risen a large amount very suddenly, it may be best to sell the stock. Dramatic rises in stock price in a short amount of time may signal a stock is very volatile, which generally has to do with temporary speculation or news. Usually these stocks have just as a good a chance to go right back down.

If the price is slowly decreasing

Although it may be hard to let go of a stock at a price below what you bought it for, slowly decreasing stocks typically don’t bounce back, as it’s generally a signal for decreasing company value. Before you lose out on even more money, consider selling the dying stock.

If the company is over-valued

If the company stock you are holding is much higher valued than competitors of the same size, your stock may be overvalued. This is a good time to sell for a profit since the market will typically balance out these discrepancies overtime, lowering the stock price (and your profit!) eventually.

If you absolutely need the money

Every one may run into hard moments in life sometimes, and as Warren Buffet said, you shouldn’t go into debt to be able to invest. If you absolutely need money for other life necessities, consider selling your stocks and putting off stock trading until it’s financially feasible.