How to Buy Stocks
Step 1: Find the best brokerage account
Shares are traded on a stock exchange, and an investor needs a brokerage account to buy and sell shares. That makes finding the best brokerage account the top priority for buying stocks.
The best trading account is the one that enables you as an investor to place buy and sell orders, hold positions and manage your portfolio with low fees. For U.S. markets, I like Charles Schwab and E*Trade. Both brokerage firms are listed on a stock exchange, and their financial status is transparent.
If you consider day trading shares, you better choose a top platform for day trading or a direct access broker where you benefit from fast order executions, order routing options, and a substantial easy-to-borrow short-sell list.
Step 2: Open your brokerage account
Once you find your preferred online broker, it’s time to open an account. Fortunately, the time of tremendous paperwork belongs to the past and opening a account can be done quickly these days. Fill out the online forms, and add the legal documents required for identification.
One more step is required before you can buy stocks with a brokerage account.
Step 3: Fund your brokerage account
Great work! You successfully opened your account with your favorite company. Before you can start investing, it’s necessary to deposit money. Consider the minimum account balance required by your broker before funding the account and transfer the minimum balance or more.
It is like a regular bank wire, but the money will be credited to your trading account instead of a checking account. Be aware that day trading stocks in the United States require a minimum of $25,000 of maintained funds due to the implementation of the pattern day trader rule by the SEC if you want to day trade more than three times per 5-day period.
Step 4: Research the stocks you want to buy
Once you have successfully opened and funded your brokerage account, it is the right time to learn how to research stocks by utilizing stock research websites. If you have specific companies in mind you consider buying, start analyzing their financial strength and SEC filings, read the latest conference call transcripts and analyze previously announced earnings releases and news.
If you have no specific ideas of the best stocks to buy right now, use the research tools to evaluate the best stocks that match your defined criteria. Such criteria include the industry where the company is active (technology, finance, etc.), market capitalization (large-cap, mid-cap, small-cap), dividend payments, etc.
Utilizing the best charting software helps to visualize the price development of a stock. Knowing how to read stock charts and using the best stock charting apps helps supplement your idea of what stocks to buy with optical proof that the stock price is currently on a price level where you consider buying stock the right decision.
Step 5: Decide how many shares of stock to buy
The number of shares to buy primarily depends on two things. First of all, you have to decide about the weight of the stock to buy relative to your overall available budget. For example, you have a portfolio of $100,000, and you want to invest 40% in exchange-traded funds and 60% in diversified stocks.
Now you know that $60,000 are available to buy stocks. You also want to diversify your investments to avoid the risk that the entire portfolio relies on one specific company’s performance. At the same time, you want to keep portfolio rebalancing efforts low and decide to have 10 different stock investments in your portfolio.
That means there is $6,000 available to invest in 10 different stocks.
You divide the $6,000 budget by the price per share to evaluate the number of shares to buy.
Let’s say the price per share is at $50 right now. You calculate the number of shares to buy this way: $6,000 divided by $50 = 120 shares.
Step 6: Buy the selected stocks using the best order type
Now you are pretty close to finally being ready to buy stocks. One thing to remember before transmitting your buy order is that there are various stock order types available that you can use to place and execute the trade.
Market Order: The market order enables you to get into the market the fastest way around current price levels. The market order is an order type used when you want to buy now with the highest priority of a full trade execution of the order and lower priority to the average price per share the buy order is executed at. So, the main benefit of the market order is that your order fill is almost guaranteed. The disadvantage is that you don’t know the exact price where the order will be executed.
Limit Order: The limit order allows you to define a specific price limit at which the order gets executed. Let’s say your preferred stock is currently at $90.50, but you don’t want to pay more than $80 per share. With the limit order, you can place a limit order at $80 (with GTC order duration if you want to keep the order good till canceled). Now, the order will sit in the order book until it gets filled or canceled. If it gets filled, the maximum price you pay is $80. It can happen that the trade execution is even better if a stock opens with a downside gap with a first print below $80, but the price per share will never be higher than $80 when you use a limit order. So, the main benefit of the limit order is that the price can be defined in advance, while the main disadvantage is that the order might never get filled at your limit price when the stock rallies continuously to the upside.
Stop Limit Order: The stop limit order is used if you don’t want to buy now and if you don’t want to buy at lower prices, but only when the price reaches a defined price level above the current prices. So, if the price per share is at $90.5 right now and you only want to buy the stock if it ever hits $100, then you place a buy stop order that triggers once the stock goes to $100 or above. The limit makes sure that the order only gets filled at the defined price. So if a stock closes at $99 and the day after it opens at $105, your order converts to a limit order at $100. However, if the price trades directly through the $100, the order gets filled immediately if supply and demand allow it to do so.
Step 7: Monitor your investment portfolio
Once you buy shares, make sure to monitor your portfolio continuously. If you are a long-term investor, frequently check if the company earnings results align with your expectations regarding the company’s growth. A stock tracking app helps to monitor multiple investment portfolios at once.
If you use swing trading strategies, ensure proper stop-loss orders are in place and monitor your long position continuously. Finally, if you day trade shares, monitor your position closely to determine when to exit and reenter the position.
Step 8: Optimize and Rebalance your stock portfolio
Your overall goal when buying stocks is clear. You want to make money with the investments you take. Still, you have to take care of your stock portfolio and act when the time requires you to do so. Optimizing and rebalancing a portfolio is entirely natural, and selling stocks is part of investing.
Suppose you realize that a position in your portfolio does not develop as expected when unfortunate company news is announced or when you need money to finance something in your life. In that case, it’s time to optimize, rebalance and sell.
Sure, as a day trader, you don’t care at all about the financial strength of a company, its dividend payments and earnings since the only thing you look for is momentum. However, as an investor, you want to choose the best companies you can hold long term. Those are the stocks that continuously move higher, where the earnings are stable in the long-term, where the dividends remain at high levels if you are a dividend-focused investor and where the peers of the companies aren’t stronger than the company you invested in.
Depending on your trading style, constantly re-evaluate if the current investment is the right one and make changes in the portfolio if needed.
Fees Related to Buying Stocks
There are various fees and commissions involved with investing activities. Banks, online brokers, and stock exchanges need to be paid.
Investing fees include commissions paid to the online broker. Commissions are paid for the service a broker offers to the client. The broker connects buyers and sellers and routes orders to the stock exchange, where orders get matched and executed.
Many U.S. brokerage accounts have zero-commission offers. While Robinhood began with this type of commission initiative, most other online brokers offer the same these days. That’s possible because they sell the order flow to third parties. Those third parties make money by mapping buy and sell orders in their own system, which allows them to make money with minimal price discrepancies.
The third party pays for the order flow in exchange, and the broker’s client can trade commission free. It is a win-win, at least when you buy stocks. If you day trade shares, consider a direct market access broker who routes the orders directly to the stock exchange because the order execution on high volume orders can be beneficial.
Commission Types for Buying Stocks
- Zero Commission: No commission is paid by the trader to the broker
- Commission per Traded Share: The trader pays a fee, typically a fraction of a cent, to the broker for each share traded. E.g., 1,000 shares * 0.002 commission per share = $2 commission for the trade. Some online brokers also combine this commission model with a minimum commission per trade.
- Commission per Trade: Some brokers still require traders to pay a fixed commission per trade, independently from the number of shares traded. This commission type suits high-volume traders but could be better for investors who trade small share sizes.
Besides commissions, there are other fees charged by a broker:
- Inactivity Fees: Some brokers charge clients an inactivity fee if they do not actively trade.
- Trading Platform Fees: Access to trading platforms with advanced functionalities might cost a recurring fee.
- Real-time Data Fees: Stock exchanges charge brokers for using their live market data. The broker then charges the fee from their clients. Still, in many cases, the broker covers those fees.
- Withdrawal and Wire Fees: A broker typically charges $25 for outgoing wires and withdrawals.
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