So you've decided to invest in the stock market. You even have some ideas about which stocks you want to buy. But what steps must you take to actually buy shares of stocks?
How to buy stock
How do you actually buy shares of stock?
Fortunately, the process of buying your first shares of stock online is relatively quick and easy. Here's a step-by-step guide to start your stock investing journey.
1. Open a brokerage account
1. Open a brokerage account
First, you'll need a brokerage account to buy stock. Consider two main factors when selecting an online stock brokerage:
- What the brokerage offers: Does the brokerage firm offer every product and service you need? Some brokerages publish excellent educational resources for new investors. Others provide access to stock research and analytical tools. Some online brokerages maintain branches where you can receive guidance in person. Perhaps other features, such as the ability to trade international stocks or buy fractional shares, are important to you.
- The user-friendliness of the brokerage platform: Is the brokerage platform easy to navigate? If you want to trade using your mobile device, the brokerage's mobile interface must be easy to use. Many of the largest brokerages allow you to use play money to experience their trading platforms before you invest, so try a few to decide which platform you like most.
Most major online brokerages, such as Charles Schwab (SCHW -2.55%) and Fidelity, have eliminated trading commissions. This largely takes cost out of the equation for investors when choosing a brokerage platform.
Once you've chosen a brokerage, you must complete a new account application. This is typically quick and easy, but you'll need certain information handy, such as a driver's license and Social Security number.
Social Security Number (SSN)
You'll also need your bank account information if you want to fund your new brokerage account using your checking or savings account. You can choose to open a standard brokerage account or establish an individual retirement account (IRA), which comes with some pretty nice tax advantages.
Another decision you may face is whether to establish margin privilege for your new brokerage account. Having margin privilege enables you to buy stocks with money borrowed from your brokerage.
To be clear, investing on margin is generally not a good idea for most investors. However, establishing margin privilege can confer some other benefits. For example, if you have margin privilege, you can typically begin trading in your brokerage account before your deposited funds have cleared.
2. Choose stocks to buy
2. Decide which stocks you want to buy
In this article, we won't go too deep into the many possible methods of researching and selecting individual stocks to buy. However, the next step is to determine which stocks you'd like to purchase. Here are a couple of pointers:
- Follow a buy-and-hold strategy: Buy only stocks you want to own for many years. Don't buy a stock just because you think it will perform well over the next few weeks or months. And day trading -- buying and selling a stock in the same day -- is best left to the professionals.
- Diversify your holdings: Don't put all your money into just one or two stocks. Even if you're investing only a relatively small amount of money to start, diversify your portfolio by buying a few shares of several different stocks. With the advent of commission-free trading, owning the stocks of many different companies does not incur any additional expense.
Learn more about how to choose which stocks to buy by checking out our comprehensive guide to investing in the stock market.
3. Decide how many to buy
3. Decide how many shares to buy
To determine how many shares you should buy, first decide how much money you want to invest in each stock that interests you and then divide this amount by the stock's current share price. You can find stock prices on your brokerage's platform by searching for either the stock's ticker symbol or the company's name.
Stock Ticker
Some brokerages allow you to buy or sell fractional shares. If your brokerage trades fractional shares, you can purchase any dollar amount of a stock regardless of its share price. If your broker doesn't, you must round down to the nearest whole number of shares to determine how many you can buy.
For example, let's say you want to invest $1,000 in Microsoft (MSFT 0.59%). You use Microsoft's stock ticker symbol (MSFT) to check its share price and find that it's $330. Dividing $1,000 by this share price indicates you can buy up to 3.03 shares. If your brokerage doesn't trade fractional shares, you would purchase three shares of Microsoft stock.
4. Choose an order type
4. Choose an order type
Different order types exist for stock purchases. The type of order you place to buy stock specifies the conditions under which you want your broker to complete your transaction. Placing a market order -- which instructs your broker to buy the stock immediately and at the best available price -- is typically the best order type for buy-and-hold investors.
On the other hand, you may want to place a limit order. This indicates to your broker the maximum price you're willing to pay for a stock. For example, let's say a stock is currently trading for $20.50 per share. You want to buy it only when the price is less than $20, so you would place a limit order. Your broker would then buy shares on your behalf only if the stock's price dips below $20.
Buy Limit Order
5. Place the stock order
5. Place the stock order with your brokerage
To place a stock order, go to the appropriate section of your brokerage's platform and enter the required information. Your brokerage typically asks for the company name or stock ticker, whether you want to buy or sell shares. You'll also enter either the dollar amount or the number of shares you want.
After you tap the "place order" button, your stock purchase should be executed in seconds (if the order type is a market order). Your portfolio should immediately update to reflect your ownership of the newly purchased shares.
Related investing topics
6. Build your portfolio
6. Build your portfolio
The final step in this process is to build out your investment portfolio. Now that you have a brokerage account and know the basics of buying and selling stocks, you can keep adding money to your brokerage account and investing in stocks you'd like to own for years to come.
As a final thought, it can be tempting to monitor the performance of your stocks every day (especially at first). However, it's important to maintain a long-term mindset.
Certainly, you can and should read quarterly reports and subscribe to news alerts. But if your stocks' prices decline somewhat, don't sell in a panic. And if your stocks' prices rise by a few dollars, resist the urge to cash out. The best and easiest way to build wealth over time is to buy shares of great companies and hold them for as long as the companies remain great.
