How to Buy Stocks - A Complete Beginner's Guide
We’ve all seen those movies where Wall Street stockbrokers jump for joy after getting millions in one fell stock-selling swoop. It seems so exciting and lucrative that you might be tempted to give it a shot yourself. But how does one actually start trading stocks?
First, you need to learn how to buy stocks, which is precisely why our guide should serve you well.
As is the case with any subject, you have to start building your knowledge from the ground up. Going straight for the top stocks would just leave you frustrated and probably penniless. After all, trading financial instruments includes a certain amount of risk that you should definitely be aware of when starting out. But more on that later. For now, let’s go over a few basic stock-related terms and the essentials of stock-buying.
What Are Stocks?
Put simply, stocks - also known as shares or equity - represent small parts of a company that you can buy and sell to make money. They fall under a broader category called securities, which are tradable financial assets. Aside from stocks, there are two other primary types of securities: the first is debt, which entitles the holder to principal and interest payments. The second is hybrid securities, which usually combine stocks and debts.
What Is a Stock Exchange?
To trade stocks, you need to visit a stock exchange. Although the terms are used interchangeably, stock markets and stock exchanges aren’t one and the same. A stock market is an umbrella term for all stocks traded in a particular country or region, while a stock exchange is an actual marketplace where securities are bought and sold.
For instance, some of the world’s biggest stock exchanges are the New York Stock Exchange (NYSE), the Tokyo Stock Exchange, and Nasdaq (the National Association of Securities Dealers Automated Quotations).
How to Start?
Depending on how you intend to buy a stock, hired brokers, or an electronic trading platform can get you into the game. Before you pick either, however, establish what your needs are. Essentially, the choice comes down to your knowledge and skill level.
If you're new to stock trading, you might be better off choosing a full-service broker, as opposed to a discount broker, since the latter usually don’t offer personalized advice. Discount brokers will execute the trades on your behalf, but they’ll leave the decision-making to you. Full-service brokers do everything for you, as the name suggests, but they don’t come cheap.
Using trading platforms and tackling online stock trading on your own is also an option. The platforms contain a variety of resources for both newbies and stock market veterans. For example, experienced traders prioritize advanced charting and trading tools, while beginners gravitate towards educational materials and quick customer support agents.Once you choose between hiring a broker or using a trading platform and set up your brokerage account, you’ll be good to go. Keep in mind that even though some firms don’t have a minimum deposit requirement, you will need a considerable amount of money for you or your broker to start trading.
How to Know What Stocks to Buy?
Most stock traders aim to buy low and sell high fairly quickly, but if a share comes with large dividends – the portion of a company’s profit it distributes to its shareholders – they may consider holding on to it for a little bit. Therefore, purchasing stocks depends on both their potential selling price and your financial objectives.
Your purchase decisions should be based on the company’s business dealings, its position relative to its competitors, the market trends concerning the products or services the company offers, as well as the direction in which the domestic and foreign economies are headed. As you can see, determining which stocks to buy requires quite a bit of research.
You can visit the websites of the companies you’re interested in and the stock exchanges on which the companies’ shares are listed to gather information. Also, don’t forget to keep track of the latest stock-related news.
If the sheer number of options seems overwhelming, look into the companies you are familiar with first. You’d be surprised at how much your personal experience as a customer can help you assess their growth potential.
Finally, every stock purchase depends on the length of time you intend to hold onto the shares: For a quick profit, the best bet is a stock with rapidly rising prices in its forecast. However, if your research has led you to conclude that a stock will gain significant value over the next several years, say, you might want to consider selling it at a later point.
Although the second tactic requires patience and won’t give you the instant satisfaction that you get from fast-paced stock trading, it can help you save money on trading fees and earn significant amounts.
High-Risk vs. Low-Risk Shares
Companies whose products or services are always in demand - for example, companies that produce basic foodstuffs - are inelastic. Even in times of crisis, their stock prices probably won’t have wild oscillations. In other words, the shares of these companies are low-risk.
Shares from newly established companies carry a high risk since the company can go under for any number of reasons. However, this kind of equity tends to be relatively inexpensive and can bring high rewards if the business pans out. An experienced stock trader might try to mitigate the risk and purchase shares from companies with a positive development perspective.
With a little luck, these can later be sold for a lot more than their original price.
While we’re on the topic of risk - you should always rely on your own findings and common sense. Learning from more experienced traders is recommendable, but trading stocks in a certain way just because everyone else does is an entirely different story.
Conformity tends to play an important role in stock market trading, especially for novice investors. A common rookie mistake is going after stocks popular with other traders, even if it means disregarding your own instincts and knowledge.
Basically, you shouldn’t rush yourself when trading. If you’re not 100% sure about a particular stock’s costs and benefits, don’t buy it. Speed will come with experience: As you keep learning, you’ll need less and less time to determine if a given stock is worth the risk.
Cheap vs. Costly Shares
In theory, every stock price correlates to the rise and fall of commodity prices. Any share’s nominal value is assigned when it first enters circulation, while its market value changes daily and depends on company policy, current operations, and prospects. These two values are often different from one another.
The share price is an essential indicator of company quality: Even if a share is inexpensive, it shouldn’t necessarily be the share you buy. Try to find shares that fall in the golden middle – neither too pricey nor dirt cheap.
What Should Your Portfolio Look Like?
A stock portfolio represents the collection of securities owned or managed by an investor. The best kind of portfolio includes shares from companies whose value isn’t affected by the same factors. This ensures that they won’t both rise or fall at the same time or in the same way. The name for this investment strategy is diversification.
A well-diversified portfolio offers excellent returns with minimal risk. A staple ingredient for a good portfolio is several blue-chip stocks - stocks from renowned, high-quality companies.
What are Order Types for Stocks?
An order is a set of instructions for how to sell or buy a stock that you give to your broker or place through a trading platform. To help you navigate the world of stock market terminology, we’ve compiled a list of the critical order types:
- A market order means that you want to buy or sell stocks immediately. It’s the simplest of all order types, and many prefer it due to the speed at which your trade is executed. However, a market order doesn’t hinge on a specific stock price.
- A limit order is an order for a stock purchase or sale above or below a specific price. With a buy limit order, the trade will happen if the stock reaches a certain price or goes lower while giving a sell limit order means that you want a trade executed at a given price point or higher.
- A stop order or a stop-loss order refers to buying or selling a stock when it reaches a pre-set price - the so-called stop price. In many cases, a stop order is used preventatively to keep the investor from losing too much money when the stock cost starts to fall. It’s similar to a limit order and also has versions for selling or buying.
Orders can also vary in terms of length:
- A day order instructs your broker or trading platform to execute a trade at a given price by the end of the day. It can be a limit order, so long as it’s completed within the given period.
- A good-til-canceled (GTC) order refers to a buy or sell request that remains in effect until either executed or canceled. Brokerage firms generally limit the amount of time that you can keep a GTC order open to 90 days.
- An immediate-or-cancel (IOC) order immediately completes all or part of an order and cancels the remainder, if any. This order is typically used for selling or buying stocks in large quantities to get them all for the same price.
- An all-or-none (AON) order is a directive to carry out a trade in its entirety or not at all. AON orders will remain active until they are either executed or terminated.
- A fill-or-kill (FOK) order is a combination of the IOC and AON orders. It lasts only a few seconds and needs to be implemented exactly as specified or be revoked.
If they have the means, beginners usually hire a brokerage firm to start buying stocks. Some firms offer professional advisors, while others conduct their clients’ trading in their clients’ place.
You’ll need approximately $500, with $200 being the minimum amount of money you should deposit into your brokerage account. Setting aside a larger amount for trading - e.g., $1000 - gives you more flexibility and increases your chances of profit since it means you can afford buying shares belonging to reputable companies.
There are two ways to earn money from buying a stock. The first is to sell the stock when its price rises, and the second approach would be to collect shareholder dividends while keeping the stock for yourself.
Unfortunately, you can lose more money than you’ve invested. Traders intend to sell stocks for more money than they bought them for, but if the price goes down, they are sometimes forced to trade it for less to avoid large losses.
Our recommendation would be to find stocks that are as low-risk as possible. Look for reputable companies and avoid extremely cheap shares, as they can be deceiving and profitless. Read our How to Buy Stocks guide for more information.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
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