Many of us know that investing is important, and trading stocks is one of the most well-known investment options.
If you’re new to the world of stock investing, you likely have questions about where to buy stocks and how to get started. To help you, our team at Remitly put together this guide on how to buy stock for beginners.
Basic concepts for beginner investors
Stocks are shares of ownership in a company. Publicly traded companies make stock shares available for purchase to gain access to funds to pay down debts, research development, expand their operations, and accomplish other goals.
Stock prices fluctuate constantly. During the trading hours of 9:30 a.m. to 4:00 p.m. Eastern time, Monday through Friday, a stock ticker tracks the ups and downs of stock prices.
As an investor, your goal is to buy stocks when share prices are low and then sell them when the stock’s price increases so you make a profit.
The name for stock purchase transactions is a trade. All trades include buy and sell orders, with the seller listing their shares for sale at a certain price and buyers offering to purchase stocks at a certain price.
Individual stock and ETF trades
You can buy stocks in the U.S. in two main ways: online and through brokers.
One option is to trade individual stocks. With this approach, you decide to trade stocks based on things like a company’s past performance, current financial strength, and predictions about its ability to grow and turn profits.
The other option is to buy exchange-traded funds (ETFs). Similar to mutual funds, ETFs may contain a variety of investments, such as stocks, bonds, and commodities. The biggest difference between an ETF and a mutual fund is that an ETF is an index fund, meaning you can buy and sell it on the stock market.
One of the largest benefits of ETFs is that they usually come with fewer expenses. If you bought the same set of investments individually, you’d pay a commission for each stock trade. By purchasing the ETF, you are charged just once.
Stock exchanges
A stock exchange is a place where you sell and buy stocks. In the U.S., there are two main stock exchanges:
- New York Stock Exchange: Also known as the NYSE, the New York Stock Exchange is the largest exchange where people trade stocks in the world.
- NASDAQ: NASDAQ is short for National Association of Securities Dealers Automated Quotation. It was the first-ever electronic trading system. Although you can sell and buy stocks from companies in an array of industries on the exchange, the NASDAQ is most well-known for technology stocks.
Common vs. preferred stocks
There are two main kinds of stock that companies can offer:
- Common stock: You get full vote rights at shareholder meetings when you buy common stock. Some common stocks also pay dividends, a sum of money that is paid quarterly, semiannually, or annually to stockholders when a company performs well.
- Preferred stock: With preferred stock, you don’t get voting rights but receive preference over other stockholders when dividends get paid out. If the company ever goes bankrupt or liquidates its assets, preferred stockholders are made whole before those who buy common stock.
Categories of stocks
When talking with a financial advisor or using an investing platform, you may see stocks broken into categories, such as:
- Growth: A growth stock tends to increase in value much faster than the average for the market. Typically, they don’t pay dividends and are best for people most interested in turning a large profit when they sell stock.
- Income: An income stock pays dividends regularly to provide a source of income for investors.
- Value: A value stock is one that experts believe is undervalued. This means the selling price is low compared to the company’s earnings growth potential. Often, these stocks are ones that investors have shied away from. These options involve risk, but for savvy investors, they could lead to big profits if the company performs well.
- Blue-chip: A blue-chip stock is from a well-known company that has grown consistently for years. Often, these stocks pay dividends.
How to invest
Today, you can buy and sell stocks in various ways, but the most common way is via online brokers. Let’s delve into the options.
Direct purchase
A direct stock purchase plan is when a company allows individual investors to buy stocks directly from it or through an agent representing it.
With this purchase arrangement, you place money in a checking account with a financial institution and provide the account and routing numbers. Then, deductions are made each month to purchase a set number of shares of stock from the company. The use of these automated investing platforms makes the process simple.
One upside to directly purchasing stocks is that they usually offer low-fee or free trades. Also, account minimums tend to be low. In fact, you may only need to deposit $100 into the cash account monthly.
One downside is that not all companies offer a direct stock purchase plan. Plus, direct purchases require you to set up accounts with each company you want to buy stocks from, and some people need help managing multiple investment accounts.
Full-service broker
A full-service broker is someone who does all the work for you. They provide investment advice and make every market order on your behalf.
When you first begin using full-service brokerage services, the best brokers will take the time to fully understand your personal finance needs.
Then, full-service brokers discuss your investment objectives with you, talk to you about what other types of investments you have, and look at your financial information. Once they understand your needs, they will help you choose which stocks to buy.
Due to the additional wealth management services that full-service stock brokers provide, their fees are often high. In most cases, stock traders pay a certain percentage of the total assets in their investment accounts, such as 2% or 3% of the total.
Discount broker
Discount brokers give you the ability to buy and sell stock through an online brokerage without all the extra services that full-service brokers provide.
Most online brokers and investing apps are discount brokers. When you open a brokerage account with a discount online broker, you deposit a minimum amount of money and then decide what to buy and when to sell.
When you want to trade stocks, you initiate the purchase or sale yourself through the online trading platform.
With this type of online investment account, you usually won’t receive personalized investment advice. Most online brokerages provide reference material and educational tools to help you make informed trades. However, it’s up to you to develop an investment strategy.
The biggest benefit to using discount online brokerages is cost. Sometimes, you pay a small monthly fee to keep your online brokerage account open and active.
Online brokerages may offset this cost by providing commission-free trading. This online broker agreement may save active traders who frequently sell and buy stock.
Other discount brokers don’t charge any fees to open or maintain an account. Instead, they charge a commission based on the size of your trades or a flat fee per trade.
When selecting an online broker, consider the following:
- How easy it is to use the trading platform
- What account minimums there are for opening and maintaining your account
- What the fees and commissions are
- What educational resources are available
- Whether the brokerage is reputable
Tips for the first-time stock buyer
Start investing early for retirement
Why start investing early? At the end of a long working career, you’ll want something to show for it, and it takes time to build retirement funds.
All stock investing involves risk. Sometimes, prices will go up, and others will go down. Long-term investors are less likely to be affected by downturns because they don’t need to sell stocks quickly.
Research before you buy stocks
With discount brokerage accounts, it’s important to research carefully before buying stocks. Gather information from many sources rather than relying on just one.
Even people who use full-service brokers are wise to do their own research. This is especially true when you first begin using a new broker.
Double-check the advice they give you compared to what experts on television, online, and print media are saying about investments to ensure you get good information.
Factor inflation into your trading strategy
Whether you’re earning dollars or any other national currency in terms of income, when the worth of that currency diminishes, so does the value in your bank account—but not your brokerage account!
To beat inflation on the stock market, small investors practice short-term and long-term investment strategies with stock trading. As inflation occurs, investors grow their money in the market to “beat” inflation.
Diversify Your Stocks
One of the key rules that most investment professionals will talk to you about is diversification, which simply means that you need to make different investments and not just have all of your investments in one place.
Any single stock price can go wildly up and down at any time, so having diversified stocks—in sectors like technology, transportation, commodities, retail, or energy—is usually a good idea.
A diversified investment portfolio will also contain investments beyond stocks and ETFs. A well-rounded portfolio may also include bonds, futures, mutual funds, annuities, and certificates of deposits or savings accounts with different financial institutions.
Try penny stocks
You may have little money to invest, but options are still available. For instance, small investors can benefit from penny stocks.
A penny stock is defined as a stock that’s worth less than one dollar per share. This makes it possible to buy a significant number of shares for just a few dollars. As a result, you gain a larger share of ownership than you would if you bought fewer stocks at a higher price.
Another benefit to smaller value stocks is getting in on the ground floor. Sometimes, penny stocks are for companies just starting—or going through a major reorganization.
When buying stocks, it’s important to consider where a company is in its lifecycle. Some small-cap or penny stock companies will be giants in the future, and if you can pick the ones that succeed, you could be ahead of the game.
Invest in innovation
Some people would say you’ll never go wrong with investing in innovation. That’s not to say that you should rush out and purchase every cryptocurrency or new technology you can get your hands on. You need to do your research.
The good news is that some of the work has already been done for you if you’re interested in cutting-edge or up-and-coming investments. Certain investment firms look specifically for “disruptors” to standard industries that might represent promising investments for the future. These funds look for the latest in robotics, genomics, cloud technology, and more.
These new innovators are put into exchange-traded funds or other baskets so potential investors can get in on the ground floor with just a few clicks.
Such funds are also doing some important work of diversification. If you’re interested in “innovation investing,” check out the major players and recent results from the Innovative ETF Channel. This might be a little more advanced for new investors, so it’s worth asking for advice from trusted sources.
Practice profit-taking
Profit-taking is an essential idea that needs explanation.
In many cases, your initial stock purchases will grow in value, but they might grow slowly (or simply). They may cycle up and down.
For example, maybe the value doubled in two years. Many people would say that’s a pretty good outcome.
But will it double again? Perhaps not. Profit-taking means taking that money and reinvesting it somewhere else for more gains. It means taking what you’ve gained and continuing to invest actively.
Manage risk
Investing in stock always has risks, of course. Research can increase your success. When you know a company and where it’s going, you may decide to hold that company’s stock for the long term.
Look at the history of one very famous investor—Warren Buffett, the “Oracle from Omaha.” He built a small business empire into a mammoth trading desk by continually investing in brands he believed in.
You can often profit from a sound investment when you believe there are real reasons for stocks to increase. Let your risk tolerance guide you as you make investment decisions.
Conclusion
With the right guidance and approach, buying stocks can help you grow your wealth and save for the future. The information outlined above is a good introduction to how to buy and sell stocks, but it’s no substitute for research and professional investment advice.
As a beginner, finding a financial advisor you can trust to help create an investment strategy that aligns with your goals is crucial.