American stock ownership has varied from a low of about 53% to a high of approximately 63% in the past 20 years. However, this means that nearly half of Americans do not own stocks. If you are a beginner and just getting started, you probably have questions about how beginners buy stocks.
Buying stocks is not complicated, although it can be intimidating because of the number of brokers, online apps, and stocks.
Should you use a full-service broker with a long history, a discount broker, or an online trading platform with a slick app? Which stock should you buy first and how much? How do you even place an order?
It sounds confusing at first, but it is not.
What is a Stock?
Before we dive into how a beginner should start buying stocks, we must first discuss what a stock is. A stock is also known as equity.
Historically, it was a certificate that represented ownership in part of a corporation or a share. Every share entitles the owner to a percentage of the corporation’s profits and assets. Corporations sell stock to finance company operations and other purposes.
The Basics of Buying and Selling a Stock
Investing in stocks for beginners is not complicated and is a straightforward process after learning some financial terms and the basics of how stocks work and how to buy them.
Stocks are mostly bought online through stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. However, there are other smaller exchanges throughout the country too.
You need to place a trade through a broker who executes the trade on an exchange to buy a stock. Thus, buying and selling stocks function like an online auction.
Sellers set an asking price for the shares they are selling, and buyers bid by setting the price they are willing to pay. Then, brokers route trades to exchanges, and the exchanges match the buyers and sellers.
The process occurs quickly online, and it is mainly transparent to the buyer and seller. A mega-cap stock like Apple (AAPL) will have tens of millions of shares traded daily. A more obscure small-cap stock may only have hundreds or thousands of shares traded daily.
How to Buy Stocks for Beginners
For a beginner to buy stocks, they must follow several basic steps. First, you need a broker. Next, you need to research which stock to buy and how many shares. Lastly, you need to place a trade. That’s it.
Selecting a Broker
Selecting a broker is the first step of buying a stock for a beginner. The challenge here is that there are many brokers to choose from.
However, there are four general categories of brokers: full-service brokers, discount brokers, Robo-advisors, and financial advisors. All brokers are online now, and some still have brick-and-mortar storefronts in specific locations.
Fuller Service Brokers
Full-service brokers were historically the standard. They offer more than just the ability to place stock trades. As the name implies, they provide other services, including financial advice. They often have a minimum account size, and the fees are higher.
Sometimes they charge transaction costs, commissions, or a percentage of your assets. In general, full-service brokers cater to high-net-worth clients.
Full-service brokers are often affiliated with a large brokerage firm on Wall Street like Merrill Lynch or Morgan Stanley. If you have the money and want more hand-holding for your personal finance needs, full-service brokers may be a good option for you.
Discount brokers used to be the exception, but today they are the norm. As a result, we are all inundated with online, TV, and radio ads for discount brokers.
This list includes Charles Schwab, TD Ameritrade, E*Trade, Robinhood, Interactive Brokers, etc. However, even large mutual fund companies such as Fidelity and Vanguard offer discount broker services.
The primary service discount brokers offer trade execution. They provide few other services to most retail investors, but exceptions exist depending on the brokerage. The main attraction of discount brokers is the $0 trade commissions.
Since discount brokers no longer compete on the cost, they are starting to compete in other areas. Hence, they offer different features. For example, some have educational tools, investment research, access to overseas exchanges, free money for the first trade or a minimum asset balance, and a few have physical offices.
For most beginners, a discount broker is probably the way to go. The costs are low, and if you are placing only a few trades per year, it is a good option.
A relatively new type of broker is Robo-advisors. Robo-advisors are discount brokers with an automated computer algorithm that automatically buys and sells ETFs for you.
ETFs hold a basket of stocks and follow an index. These platforms are increasing in popularity because of their ease of use and access through smartphone apps.
Popular Robo-advisor platforms include Personal Capital, M1 Finance, Acorns, Wealthfront, and others. Even older discount and full-service brokers have Robo-advisors now.
Robo-advisors are attempting to take on some of the decisions of which stocks to buy. So, instead of buying stocks directly, you are buying ETFs that own stocks.
The platforms typically ask a series of questions about goals, age, risk tolerance, time and then execute trades to build a portfolio for you.
Robo-advisors are not something that beginners should set and forget. In a taxable account, trades placed by a Robo-advisor may have taxable capital gains.
The last option is to work with a financial advisor. Sometimes they are also known as investment advisors or wealth managers. They are full service, but their capability varies.
Financial advisors charge either fee-only or based on commission from the brokerages. These two payment models are very different, and you should research them.
If you do not know anything about stocks, fear tech, and have no desire to learn, this may be the option for you.
However, most financial advisors won’t take on new clients unless they have a minimum amount to invest, often $100,000 or more. This minimum makes it hard for a beginner investor to figure out how to buy stocks to hire a financial advisor.
Doing the Research
Selecting a broker can be difficult but figuring out which stock to buy is equally challenging. A lot depends on the type of investor you are and your risk tolerance.
For example, are you a dividend growth investor, a growth-only investor, a high-yield investor, etc.? Your risk tolerance also matters, and most beginner investors learning how to buy stocks do not yet know their actual risk tolerance.
If you are doing your research, the best place to start is to use a stock screener. For instance, if you want to buy stocks with a dividend yield greater than 3%, you enter the criteria, and the screener will provide a list.
After that, you should research the individual stocks by looking at company filings on the investor relations page. This information includes quarterly earnings releases, annual reports, SEC filings like the 10-Q, historical data, and other information. For most beginners, this is difficult since they do not know where to start.
A second option is to leverage the numerous investing newsletters and websites that focus on investing. There are also social media channels focused on investing, like the many ones on Reddit.
In addition, crowd-sourced stock research is available on websites like Seeking Alpha. Lastly, most full-service and discount brokerages allow their clients to access research reports. If you choose this route, you are relying on someone else to do the research.
Researching and picking stocks is not difficult, but it does take time, and there is a learning curve. Suppose you are unsure where to start; investing in what you know may be best. Warren Buffett has said, “Never invest in a business you cannot understand.”
Place the Trade
Once you know the stock you want to buy, you must place the trade, which entails buying a certain number of shares at the price you want to pay. For example, if you have $2,000 that you want to invest, you could buy about 14 shares of Apple stock at $140 per share.
When you enter the information to place a trade, you also need to set the type of order. There are market orders, limit orders, stop-loss orders, and stop-limit orders. There are other types of orders as well. Most beginner investors will use a limit order.
A limit order is a trade to buy or sell a stock at a specific price or better. In our example, suppose you place a buy limit order for Apple at $140 per share, the brokerage will not execute the trade if the stock price is over $140 per share. Limit orders may not be filled or only partially filled.
When placing a trade, several other options, including all or none, are only executed if all the shares you want to buy are available at the price you want. A second option is good for the day, meaning the orders expire if unfilled at the end of the day.
Final Thoughts on How to Buy Stocks for Beginners
Buying stocks for beginners can be confusing and intimidating for some people who have never done it before. However, it does not have to be, and, after learning about the process, it is pretty simple.
New investors building a portfolio of stocks should understand that the process should not be done once but over a more extended period. Another consideration is risk diversification; you do not want to be overly concentrated in one or a few stocks.
Finally, after you build your portfolio, it needs to be monitored and periodically reevaluated.
Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.