Learning how to buy stocks is your first job as an investor. Since stocks are a key part of your portfolio. According to Vanguard, a 100% stock portfolio returned an average of 10.1% a year from 1926 to 2018. During the same period, a 100% bond portfolio earned 5.3% a year. Investing in stocks, however, involves more risk. This guide will show you how to buy stocks step-by-step.
1. Open an Account to Start Buying Stocks
The easiest way to purchase stocks is through any online brokerage account, but it is not your only option. An online brokerage account is a great place to get started if you are a hands-on investor who enjoys researching companies and learning about markets.
Online brokerages offer both tax-advantaged and taxable accounts. To fund your retirement, consider opening an individual retirement account (IRA) that offers tax advantages, such as tax-deferred investment growth and tax credits on your tax return. Consider a taxable brokerage account if you want to invest for a day sooner than retirement – or if you’ve already maxed out your retirement accounts. Although they don’t offer the tax advantages of IRAs, they don’t have any restrictions on how much you can deposit or when you can withdraw funds.
In addition, you might be asked if you wish to open a margin account with your online brokerage. A margin account enables you to purchase stocks with borrowed funds from the brokerage. Experienced investors can buy more shares of stock with less of their own money. But it comes with some additional costs and a greater level of risk.
Direct Stock Purchase Plan
You may want to consider a direct stock purchase plan if you have already identified stocks you wish to purchase. Direct stock purchase plans are not available at all publicly traded companies, but many of the biggest, most popular ones do. Direct stock purchase plans require no brokerage account. Additional fees, however, are almost certain.
In most cases, direct purchase plans are administered by third parties rather than by the businesses themselves. AST and ComputerShare are the most common administrators of direct purchase plans. Direct purchase plans are charged an additional fee by both companies. Most online brokers, however, do not charge commissions for buying or selling stocks.
Let’s take Coca-Cola as an example. Coca-Cola stock can be purchased once on ComputerShare for a fee of $5.00 or recurring for a fee of $2.50 if you make 10 purchases of $50. There is a processing fee of $0.05 for every share bought either way. Dividends reinvested are subject to a 5% charge up to a maximum of $5. If fractional shares are necessary, ComputerShare will round them up.
Since many online brokerages now offer low- and no-fee services, direct purchase plans have become less popular. Nevertheless, they may offer investors a slight discount when purchasing a company’s shares. Which may help compensate for the fees they charge. Before you place your first order, carefully evaluate the benefits of investing through a direct stock purchase plan.
These firms provide a range of financial services to their well-heeled clients, including retirement planning, tax preparation, and estate planning. In addition, they can help you buy stocks. Full-service brokers are notorious for charging high commissions compared to online brokers.
For wealthy investors who lack the time to keep up with their complicated financial lives, full-service brokers offer a high level of trust as well as special treatment. You should consider direct purchase plans or an online brokerage if all you want to do is buy stocks.
Robo-advisors analyze your financial goals and risk tolerance while recommending investments according to your timeline and timeline. During the registration for a robo-investor platform, a series of questions are asked to evaluate these factors; the platform then invests your money in a customized exchange-traded fund portfolio that meets your needs.
With robo-investors, you don’t purchase stocks directly – you purchase a portfolio of ETFs. Stock ETFs are likely to be among those funds, such as SPDR S&P 500 ETF Trust (SPY), which aims to match the performance of the S&P 500 stock index. However, other types of funds might include bond funds, like Vanguard Total Bond Market ETF (BND) that invests in fixed income securities.
In other words, investing in a robo-advisor isn’t a bad idea, especially if you’re not hands-on. Remember that robo-advisors may not be the best option if you are looking to buy stocks.
2. Explore The Stocks You Would Like to Buy
Shares of publicly traded companies are available on the market from thousands of companies. Choosing which stocks to buy can be daunting. If you are looking to buy stocks, you might consider a well-developed strategy. Look into buying growth stocks or a dividend portfolio.
- Growth stock is a stock of a company that is experiencing rapid, robust revenue or profit growth. A lot of these companies are relatively young and have a lot of potential, or they serve growing markets. Growth stocks, regardless of their price, are assumed to produce strong price gains over time if their rapid growth continues.
- Value stock is one that is discounted, but which is poised to see its price rise as the market begins to recognize its true value. By investing in value, you are looking for shares at an attractive price, with a low price-to-book ratio and low price-to-earnings ratio. Investing in underpriced stocks and holding them for the long haul is the goal.
- Dividends stock. Companies that pay dividends to shareholders share a part of their earnings with them. Dividend stock investors aim to earn a steady income from their investments regardless of the stock price movement. There are also certain sectors more likely to pay dividends, including utilities and telecommunications.
A Stock Screener Will Help You Find Stocks to Buy
Choosing stocks to buy can be a challenge no matter which strategy you use. By using a stock screener, you can narrow down your list of potential companies to invest in and eliminate all companies that do not meet your parameters. There are several free stock screeners available online, and almost all online brokerage accounts offer these services.
Stock screeners let you choose between small-cap stocks and large-cap stocks, or view the shares of companies in decline and those that are at record highs. They usually also allow you to search for stocks based on industries or markets. Shares that are overpriced or underpriced are indicated by the P/E ratio.
3. Execute Trades in Your Account
You can now execute trades in your brokerage account after you have opened an account and funded it with funds. There are a few details you need to know before you put in an order to purchase stock-purchasing stock isn’t as simple as clicking the buy button on an app. In general, you will need to select an order type, which will provide instructions on how to purchase a stock.
You will typically have two types of orders to choose from:
- Market order. The broker is instructed to buy the stock immediately at the lowest price. Market orders are not necessarily executed at the same price as when you place them – prices change in milliseconds, and your request is only to get the best possible price from your broker.
- Limit order. Within a specified time frame, you can set a price you want the buy to occur at, and the buy will only be executed if the stock falls to that price or lower. Limit orders expire if the stock does not reach the specified price before they expire.
Think about fractional shares if you have a small balance in your account, but the shares you’d like to buy are extremely expensive. Alphabet, Inc., the parent company of Google, is priced at almost $1,500 a share as of late September 2020. The stock can be purchased for as little as a few dollars with fractional shares. Fractional shares are being offered by more and more brokers, including The Motley Fool, Fidelity, Coinbase and Robinhood.
4. Look At The Dollar-Cost Average When Buying Stock
Prices on stock markets fluctuate constantly, which is a problem. The price of a stock that appears reasonable today isn’t necessarily something you can count on tomorrow.
You can solve this problem by dollar-cost averaging: Spend a set amount of money over time on stocks, and you’ll pay less per share on average. With dollar-cost averaging, you can begin investing immediately instead of waiting until you have accumulated a nice balance. By spreading out your purchases over a long period, you minimize the risk of purchasing either extremely high or low.
As an example, let’s say you buy $10 a piece of stock in week two, $5 apiece in week one, and $9 apiece in week three. Despite the price drop, you have paid an average of $8 a share instead of $10 a share if you mistimed your investment and bought all your shares at a higher price. You would also buy more stock at $5 a share than at either of the other price points if you invested the same dollar amount every time.
Stock buying success relies on the mantra, “Buy low, sell high.”. Although practicing it can be mentally challenging, and even experts sometimes disagree about what a stock’s “low” or “high” should be. Using dollar-cost averaging for automatic, recurring stock purchases helps make investing a routine part of your life.
5. Think About When to Sell Your Stock
Selling your stocks when you need money is the best time. The long-term investor should set financial goals and establish a timeline for reaching them. Whenever possible, your plan should include an approach to utilizing your investments and accumulating cash.
In other words, deciding when to sell a stock depends very little on what the stock market is doing at any particular moment. Day trading or trying to make a quick profit by day monitoring the price movements is riskier than investing and should not be done every day.
Thinking again about why you bought the stock, and determining if anything has fundamentally changed, will help you decide whether you should hold onto your losing stock. Otherwise, you might be better off buying more during a dip in price.
Stock Sales and Capital Gains Taxes
Be sure to understand the tax consequences of the sell order before you give your broker the sell order. You may have to pay capital gains taxes if the price of the stock has gone up since you bought it. If you own shares for a year or less, gains on those shares are taxed at the higher ordinary income tax rate. After one year, shares sold get taxed at 0% to 20% on long-term capital gains in 2020.
In this case, the loss can be used to offset gains made elsewhere in your portfolio. Imagine that the price of one stock you own dropped by $10. Taxes are only due on the $5 difference of a gain of $15 on a stock you sell. Keep in mind, however, that once you claim this tax benefit you cannot repurchase the stock you sold at a loss, or anything similar, for 30 days.