How to Buy Stocks ( Step by Step )
How to Buy Stocks. Buy stocks is not difficult, but you’ll need a little guidance if you haven’t done it before. On the other hand, making money consistently from buy stocks can be very difficult. Most mutual funds underperform the index, which means even professionals don’t find this easy. So take everything you read with a grain of salt.
How to Buy Stocks
Before You Buy Stocks
1- Do nothing until you know what kinds of stocks to buy and under what circumstances to sell.
Go to the local library and search online to find books and other resources on stock investing. A few excellent books to start with include “The Intelligent Investor” by Benjamin Graham, “Security Analysis” by Benjamin Graham, and “Common Stocks” by Philip Fisher. Also see Invest in Stocks.
2- Put your finances in order.
Pay off as much debt as you can and minimize the loans you’re taking out. Ideally, all high interest rate loans should be completely paid off first, and the only loan, if any, you should have is mortgage on the home you live in. Build three to six months worth of expense in a separate savings account before you start buying stocks.
4- Do your due diligence.
Research the company thoroughly before buying stock in it. Start with an online financial site like finance.yahoo.com to get a quick idea of the business and key financial ratios. Look at the balance sheets and income statements for the past 10 years to see if they are sound.
Companies with a high debt load and poor record of profitability may be quickly eliminated from further consideration. Read the recent annual and quarterly reports (SEC 10-Ks and 10-Qs). Explore the company’s website, if one exist.
Read analysts’s reports, if available. If still interested, you may wish to speak to the company’s customers, competitors, and suppliers, then finally the company’s executives themselves to get a better idea of the business.
Ways to Buy
1- Buy Stocks direct.
Some companies offer direct stock purchase plans (DSPPs).
Most plans allow you to invest as low as $50 per month, automatically withdrawn from your bank account. A few companies, such as Procter & Gamble , offer no fee investment plans.
DSPPs also allow you to reinvest all your dividends automatically. Some companies even give you a discount, such as 5 percent, for dividend reinvestments.
2- Use an online discount broker.
Some brokers may even offer a certain number of free trades, provided you meet certain criteria, so make sure you read carefully before committing to a broker.
- Send the broker an initial deposit of funds. (Your broker needs this money to purchase your stocks.) The usual minimum is $2000 but can be as little as $500.00.
- Select your stock, notifying your broker of the company’s “symbol” (a 1-5-letter code), the price you’re willing to pay per share, the number of shares to buy, and the length of time for which your offer will be valid (e.g. Single day vs. Good till Cancelled). Instead of specifying a price you are willing to pay (call a ‘limit order’), you may also put in order to Buy Stocks at the market, which means you order is immediately filled at the current ask price for the stock.
- Before you Buy Stocks stop. Watch. Learn. Paper trade. Don’t trust anyone’s advice until you have confirmed that what they say works consistently. If you are considering buying a trading system from anyone, look at some of the reputable financial forums such as trade2win or moneytec. You will find most of them there….and a heap of dissatisfied customers.
- Maintain meticulous records of all your stock trades, including the stock, size of the trade, cost basis (price you pay including any commissions, fees, and adjustments), sale price, and dates of transactions. You will need these information to calculate capital gains taxes. From time to time, you will need to adjust your cost basis to account for return of capital, splits, depletions, spinoffs, distributions, etc.
- Many people erroneously believe that a broker is required to buy stocks. This is not the case. If you feel confident enough, and have the necessary experience, opportunities abound for buying stocks all by yourself without any broker involved. Although this is not an option most beginners consider, it is something one must look into once they have established themselves in the field and have a sound background and knowledge of the field.
- Try using stop losses with paper trades. If that works well, consider using stop loss before every trade, and exercise it ruthlessly. A ‘stop loss’ order specifies that if a stock falls below a specified price, the stock will be sold. For example, if you hold 100 shares of Union Pacific (UNP), and the stock is trading at $100 a share. If you enter a stop loss sell order for 100 shares of UNP at $90, your sell order will become a market order when the stock falls to $90 or below. Know that if the stock drops too fast, your execution price may fall significantly below the stop loss price of $90. To protect against executing at a price less than your stop loss price, you can use a stop limit order, which means the stock drops to your specified stop limit price, your order becomes a limit order at that price, and does not guarantee the execution of your order. Don’t make decisions on the fly! Be aware, however, that in volatile markets, stocks can easily lose 50% and then go up 5 times the value. It is better to Buy Stocks low and sell high if you are trying to invest, rather than buying high and trying to sell higher in speculation.
- Don’t Buy Stocks too much of one investment, to insulate yourself from firm-specific risk (the risk that an individual stock may blow up due to some unexpected adverse developments in the underlying company); balanced portfolios tend to increase in value in the long-term.
- Index funds, an alternative to individual stocks, provide a balanced, low-cost (low/no management fees) way of investing, and have consistent long-term gains.
- Instead of offering a specific amount (and a timeframe) for the stock, you may purchase the stock “at market value”, which executes immediately.
- Although you should “diversify” your stock portfolio by owning stock in several industries, buy stocks primarily in industries you are familiar with.
- Know that your investments with each broker is insured by the SIPC for up to $500,000.
- If in doubt, do nought.
- Avoid the common mistakes that plague new comers to the stock market, chief among which is speculation in stocks. Speculation takes many forms, including buying and selling too frequently trying to make a fast profit within months, chasing the hottest stocks (stocks with the biggest recent gains), also known as “momentum investing”, feeding the dogs , buying stocks on margin, short selling, buying options and financial futures. Speculation in stocks is a long-term losing strategy. If you are not yet fully convinced not to speculate, practice trading on paper, ie. do not actually trade stocks, but pretend that you are buying and selling stocks, and record the transactions on paper, or in a computer spreadsheet. Make sure to include commissions and taxes in each transaction.
- Before buying stocks, make sure you have a decent idea of how to choose which stocks to buy.
- Do not use market orders for thinly traded stocks; use limit orders only. Thinly traded stocks have much widely spreads, which means a market order can be filled at a much higher ask price than the last traded price of the stock.
- Be cautious with the use of margin in buying stocks. To avail yourself to the use of margin, you must sign a form with your broker, acknowledging your understanding of the inherent risks associated with margin trading. Margin allows you to put up only 50 percent cash and borrow the other 50 percent from the broker to Buy Stocks position. A cash deposit of $5000, for example, allows you to Buy Stocks a position up to $10000 with the use of margin. If your stock subsequently loses 50 percent, however, your broker would issue you a margin call to put up more money, or else your position gets sold off to prevent your account from going underwater (i.e. owing more than it is worth). Because fluctuations in the stock market are the norm and can be quite volatile at times, use margin at your own risk.
- There is plenty of free advice from reputable people. There is also plenty of free and seemingly credible advice that is both misleading and wrong.
- Many of the established text books and bibles on trading – particularly on technical analysis – contain assumptions repeated so often they have gained the status of fact without ever being proven! If you find that hard to believe then download a stock price into a spreadsheet and test the moving average crossing methods repeated in every book on technical analysis and shudder at how much money you would have lost! It just isn’t as simple as it is painted.
- Make sure your broker is registered with the SEC. Stick to the brokers advertising on network TV if you are unfamiliar with the industry.
- Depending on the brokerage fees, it will be difficult (or take a long time) to recoup an investment of less than $1500 on any single stock purchase.
- Most brokers now charge a flat commission per trade regardless of the size of your trade, although some still charge commission on a per-share basis. In addition, you have to pay a SEC Section 31 regulatory fee when you sell.
- Realise that people who promote a stock often do so because they want to sell it. In other words they hype a product in order to sell it. This way of looking at things is called “Contrarianism”. So when people say “BUY”, it’s actually time to “SELL”, or if you don’t hold stock already, it may not be the time to Buy Stocks at all! Always DYOR (Do Your Own Research) and then some. In contrast, when someone says sell, it might indeed mean buy, so take a good look at the stock.
- Most day traders lose money, and very few fund managers beat the indexes over any length of time. Stock trading is easy. Making money is hard. So look for a system, prove it to yourself, and then don’t deviate!
- Do not let your emotions when you are buying stocks. Just because you love Krispy Kreme doughnuts does not mean you should be buying stock in this company. Even the best products can be run by companies with terrible management which will eventually run them into the ground.