Are you a newbie investor who wants to learn how to buy stocks? If you take the time to do your research before diving into the market, you stand a better chance of making fruitful investments.
For beginners, we recommend buying stocks online because the process is more straightforward, intuitive, and accessible. It’s just downright easier!
All you need are some basics to get you started:
1. Choosing the Right Investment Platform
There are many online platforms for investing in the stock market, and each option comes with unique advantages and disadvantages:
● Online brokers. Online brokers offer flexibility, control, and lower charges than their traditional counterparts.
● Full-service brokers. Some online brokers offer a personalized, white-glove experience where they share valuable market insights and help guide your stock purchase. However, they often come with high management fees that equate to lower returns.
● Trading apps. Many investors use trading apps because they are cheap, convenient, and fast. However, these platforms usually “gamify” the investing process and tempt users into buying and selling stocks without doing ample research.
While any of these options can work for you, we will focus on using online brokerages because of their lower costs and reliable baseline features.
Pro Tip: You might be thinking, “How can I buy stock directly from a company instead of having a middleman?” While this option can save you on fees, it also lacks convenience. For beginner investors, it might be challenging to research information, compare different company profiles, and manage stocks without a brokerage platform.
2. Selecting an Online Stockbroker
Many experts agree that brokers are a good starting point for anyone learning how to buy stocks online. These entities have the license for buying and selling stocks via an exchange. Selecting the right one mostly boils down to your objectives and personal preferences.
Are you looking for a long-term retirement fund, or are you more interested in day trading? Once you know what kind of investments you want, you can start evaluating online brokers based on several important factors, such as:
● Account fees and minimums
● Platform reliability
● Extra features like education, tools, promotions, and customer support
After choosing a broker, you will have to fill out an application form, provide a valid ID, and select your preferred account funding method.
Pro Tip: Having trouble narrowing down your options? You can never go wrong with sticking to large, established online brokerages like TD Ameritrade, E*Trade, Interactive Brokers, Robinhood, Vanguard, Fidelity, and Ally.
3. Researching Your Stock Options
You might have searched online, “How to buy Amazon stock?” or “How to buy Tesla stock?” thinking well-known companies are the “safe” option. However, before you start buying and selling, you should learn as much as you can about your potential investment, regardless of their status.
Thanks to the internet, information is now democratized in a way that makes it easy for investors to educate themselves on public companies to make better-informed decisions.
You can approach this step by reading news coverage from trusted sources and company announcements. If you’re looking for a place to start, Google News is a convenient way to find multiple sources on one platform.
While you’re doing your due diligence, one crucial piece of information to look for is the stock’s beta – or its measure of volatility over the last five years. Many often consider the beta to be the opposite of the S&P 500, a standard of stability. Companies have higher betas when they fluctuate significantly relative to the S&P.
Simply put, betas lower than one is “low risk” while those greater than one is “high risk.” You shouldn’t necessarily avoid higher-risk companies, but you need to watch them regularly if you want to avoid a loss. Investors who prefer something less management-intensive can start with low beta companies.
Another statistic to consider is the price to earnings ratio – or the price investors are willing to pay for the profit a company makes. Some people may invest more in a particular company because it’s “safe” or growing at a fast pace.
Keep in mind that a company with a low price-to-earnings ratio doesn’t necessarily make it a bad investment. In fact, it may actually mean the opposite because they are rapidly growing without many investors noticing.
Pro Tip: As a beginner who’s learning the ropes on how to buy stocks, we recommend starting with established blue-chip companies to help you hone your research process.
Set a budget or spending limit before anything else. If, for example, you allocate $100 for investing in a certain company, and one of their shares sells for $10, then you would get ten shares.
Very successful and established companies like Amazon and Google have a very high stock price – we’re talking four-figure averages. When you want to invest in these companies, you can overcome the cost hurdle by getting fractional shares instead. These shares offered by online brokers allow investors to purchase a part of a stock instead of the whole share.
Many online brokerages also give the option to convert dollar amounts to shares for your convenience. This is a convenient way to quickly see how much you can invest in a particular company with your budget.
Pro Tip: When buying stocks, always start small and wait until you get the hang of things before investing in larger amounts.
5. Choosing Your Stock Order Type
When buying stocks, you should consider the two main order types: market orders and limit orders. With market orders, you can purchase stock immediately at their current offer price. However, the market changes rapidly, and there’s a chance that the price will fluctuate if you choose this order.
You can control the stock price of what you’re buying with a limit order – where you can set parameters. This option lets you set a maximum or minimum price, so your purchase won’t proceed if it doesn’t meet your criteria. This is a great strategy to prevent you from spending too much on a particular stock, especially if it’s volatile.
Pro Tip: Having trouble deciphering all the phrases on your broker’s order page? Learning these popular stock-trading terms might help:
● Ask. If you’re a buyer, this is the price a seller is willing to take for their stock.
● Bid. If you’re a buyer, this is the price you are willing to pay for your stock.
● Spread. This is the difference between the lowest ask price and the highest bid price.
● Stop order. When a stock reaches a set price, a stop order executes automatically.
● Stop-limit order. As the name suggests, this option combines a stop and limit order, where the trade turns into a limit order after reaching the stop price.
6. Optimizing Your Portfolio
If you want to reduce the risk of losing money on your portfolio, we recommend spreading your stocks across various industries and companies. This strategy can protect you, even when entire industries take a hit – as many did during the COVID-19 pandemic – or when a particular company starts failing.
One of the most cost-effective ways you can achieve a well-balanced portfolio is through index funds. When you buy index funds, you invest in a group of stocks that automatically follows the performance of a particular sector or market.
For instance, the S&P 500 index fund tracks the output of the 500 biggest public companies in America. Some index funds may also track particular sectors like healthcare, food, or tech.
7. Maintaining Your Account
After you’ve gotten the hang of online stock buying and optimizing your account, it’s finally time to maintain all your hard work. Proper portfolio upkeep includes these two basic steps to further growing your wealth:
Regularly Add to Your Account
Continue to contribute money to your investments. You can even set up recurring amounts and treat them like a regular utility bill.
If you’re investing in an index fund, many experts recommend dollar-cost averaging. This strategy involves contributing the same amount of money at fixed intervals – like once per paycheck or once a month – via a market order.
When done correctly, it can help you stay consistent with your portfolio maintenance and reduces the chances of buying at unfavorable prices.
Hold Your Investments
Do you want to know how to buy and sell stocks with the least risk? Hold them for a long time. History shows that long-term investments will outperform the market when investors time their selling right. As an excellent example, the S&P 500 index fund has had positive returns for most investors who hold over 20-year periods.
Start Investing Today
Be diligent while taking these steps in our “How to Buy Stocks” guide, and you’ll have a solid foundation to help you get started with your stock investments. Just remember that every form of investing is a process – not a destination. You need to learn and experiment on an ongoing basis to get the most bang for your buck.