There are two main ways to buy stocks. The first and most common way is through a stockbroker. The second and far less common way is through the company itself.
Investing in your first stock can be a daunting experience, almost like diving into icy water. You want to make sure you are doing it right. Here are 5 steps to buying your first stock.
Step 1 Find a Broker
The first step to buying your first stock is to find a broker. Back in the day, you needed to work with a human stockbroker as you see in the movies. This was expensive and so only the wealthy could afford to buy stocks. With the adoption of the internet came discount or online brokers making investing in stocks much more affordable. Buying and selling stocks will usually cost you less than $20 per trade and in the United States, more brokers are moving to free brokerage.
Opening a brokerage account is as easy as opening a bank account. Just complete the online application, provide ID, link a bank account, or deposit funds and you will be on your way.
When choosing a broker there a few things to consider.
- What are their fees? The lower the better.
- Do they have a minimum account balance? Also the lower the better.
- What investment options do they offer? You may want to trade international stocks.
- How much support do they provide? Can you call someone urgently?
- How easy is their platform to use?
Once you have decided which broker to use and set up your account it is time to choose the stock you want to buy.
Step 2 Choose the stock you want to buy
There are to main ways to buy stocks. You can buy individual stocks such as Facebook, Apple, and Amazon. Or you can buy Exchange Traded Funds (ETFs).
An ETF is a type of fund, like a mutual fund. This fund will buy many different companies. When you buy shares in the ETF you too become an owner of all the companies that fund owns.
For example, the Vanguard S&P 500 ETF (VOO) is a fund that invests in companies that make up the S&P 500. The S&P is a collection of the 500 largest companies in the United States. VOO owns companies such as Microsoft, Apple, Facebook, and Amazon. If you buy a share of VOO you too will become an owner of all these companies.
Once you have chosen the stock you want to invest in whether that be an individual stock like Facebook or an ETF like VOO it is time to decide how much you want to invest.
Step 3 Decide how much you want to invest
When it comes to investing there are 3 general rules.
- Don’t invest money you can’t afford to lose.
- Don’t borrow to invest.
- Don’t invest money you may need in the next 5 years.
Don’t feel like you need to throw everything you have at the stock market. Start small with just a few hundred dollars. This will allow you to become familiar with how to place orders, how settlement occurs, and the overall investing process. Also with a small investment, you won’t lose sleep wondering if you have made a huge mistake.
By deciding how much you want to invest you can work out how many shares you can buy. For example, you want to invest $500 and the shares cost $100 each. You will buy 5 shares.
Once you have decided how much you want to invest and how many shares you want to buy. It’s time to place an order.
Step 4 Select and order type
There are 2 main types of stock orders.
- Market Orders
- Limit Orders
When you place a market order it means you are willing to buy at the best available price. If the stock last traded for $95 and someone is willing to sell for $95 you will pay $95. Beware however when the price someone is willing to sell is much high than the last traded price. This is known as the spread. The last trade price could be $95, but if the best price that someone is willing to sell is $100 then you will pay $100.
Because stock prices can be volatile in smaller companies market orders are best used to buy large stocks with very little spread and volatility.
Market orders are best used when you plan on holding the stock long term and don’t mind small differences in price. Place a market order if you want to make sure your order is filled.
When you place a limit order it means you set the exact price you are willing to pay for a share.
For example, you may place a limit order to buy a share for $90. Your trade will not be executed unless the price reaches or goes below $90 per share.
Limit orders guarantee the maximum price you are willing to pay but it does not guarantee that your order will be executed. If the price does not drop to your limit the trade will not be executed.
Limit orders are best used for small companies with high volatility and spread.
Step 5 Celebrate
If you managed to successfully open your account, select your stock, decide how much you want to invest, and placed an order then by now you should be the proud owner of your very first stock.
Depending on your strategy will determine what you do next. You may be a buy and hold investor and never sell your stocks. Maybe you are a value investor and saw an opportunity to buy an undervalued stock. Perhaps you are a short term trader and will look for a timely exit.
No matter your strategy you have just begun your journey as a stock investor, congratulations.