How to Buy Stock: Everything You Need to Know

In order to buy stock, you need to set up a brokerage account. Brokerage accounts allow you to deposit money and purchase stocks utilizing your funds. Setting up a brokerage account is easy since most brokers will allow you to deposit money through your online bank. The process of signing up for a brokerage account takes less than 10 minutes.

If you were to purchase $100 worth of stock, $100 worth of bonds, and $100 worth of gold, and take a look at the returns each investment earned you over a 100-year period, the $100 worth of stock would outperform the other investments by a mile. It’s due to these great potential returns that you’ll want to know how to purchase stock.  

Below, we list every step you should take to buy stock online:

Step 1: Select Where to Buy Stocks

While there are many ways to buy stock, the easiest and fastest method is to make your purchases through an online brokerage account. You can fund most brokerage accounts via electronic funds transfer within a few days, and in fact you can fund some stock accounts and start trading within a matter of minutes. 

Some sophisticated investors might choose to buy stock through in-person brokers or from companies directly. However, if you’re a beginner investor you’ll likely want to stick to online brokerage accounts since they are more accessible than direct investments and oftentimes cheaper than their in-person counterparts.

Not all brokerage accounts are created the same, meaning you’ll want to shop around to ensure you’re getting the right stock account for your needs. Selecting the right online brokerage depends on your unique needs and wants as an investor. Here are some of the things that you should consider when selecting an online brokerage account:

  • Account Minimums: Depending on how much you’re willing to invest, you may want to select a brokerage account with low or no minimum deposits. Some brokerage accounts mandate that customers maintain an account minimum, which is usually equal to or over $500; accounts that fall beneath this level may incur fees.
  • Fees: It’s hard enough trying to outperform the market, you don’t want unnecessary brokerage fees eating into your returns. This goes double for accounts that charge you to transfer funds or to close out accounts.
  • Trading Tools/Features: Make sure you consider the features of your online brokerage account especially if access to financial planning tools is important to you. 
  • Promotions/Bonus Offers: Since you’re already opening up an account, it makes sense to take advantage of any existing promotions that might reward you with extra funds.  
  • Trading Commissions: While this used to be a concern, there are plenty of major online stock brokers that offer $0 commissions per trade for stocks. You may however wish to consider fees charged for other types of trades, like options or futures contracts.  

Step 2: Determine What You Want to Get Out of Buying Stocks

Before buying stock in a company, it’s important to determine what you want to get out of the experience. While some readers might say “Money, duh!”, they would be well served by thinking a little deeper. Here are a few investor archetypes to consider and the type of brokerage account we would recommend for each:

  • Investors buying stocks as a hobby: Any major online brokerage should suffice since you’ll be able to use their online tools and set many types of stock orders.
  • Sophisticated investors: We would recommend opting for an online brokerage. You likely already know what you’re doing, so it’s best to think about the features within the online broker’s platform that you want access to.
  • People saving for retirement: If you’re saving for retirement, you have two options – passive or active investing. As a passive investor, you’ll likely want to opt for a robo advisor so you don’t have to check your account frequently. As an active investor, you’ll want to sign up for an online brokerage account since it’ll allow you to set your investment portfolio in a more self-directed manner. 

By understanding what kind of investor you are, you’ll be able to better understand why exactly you want to buy stocks and you’ll be better equipped to create an investment plan that aligns with your needs.   

Step 3: Determine Your Risk Profile When it Comes to Buying Stocks

Once you determine what you want to get out of stocks, you’ll be able to better assess how risky of an investment you might be willing to take part in. For example, if you’re someone who is in their late 50’s aggressively saving for retirement, it wouldn’t make a ton of sense to load up on a portfolio which consists mostly of growth technology stocks. You would likely want to ensure that you have a balanced portfolio (including some fixed income) since more risky investments could jeopardize your upcoming retirement. 

It’s important to keep in mind that every single investor’s risk profile will be different. Generally, the younger you are, the riskier you can afford to be with your investment strategy. However, you should think hard about your investment goals before you purchase stock.

When buying stocks, you want to make sure not to make a large purchase of stock at one time because it makes your investment more susceptible to price changes.

Example

Dollar Cost Averaging

Let’s imagine you just purchased 10 shares of Amazon stock at $3,000 per share (a $30,000 investment), but tomorrow the price drops to $2,900 per share. You are now down $1,000. A way to avoid being exposed to volatility in stock prices is to use a dollar-cost averaging strategy when investing, meaning simply purchase the same 10 shares, but over a longer time span in order to avoid buying a large amount of stock at one specific price. By using dollar-cost averaging in our scenario mentioned above, you might have purchased 3 shares at $2,900, 5 shares at $2,950, and 2 shares at $3,000, reducing the hypothetical loss to $450. 

Step 4: Research Stocks Before You Purchase

Once you’ve selected and funded a brokerage account, it’s time to start researching stocks you might want to purchase. We suggest starting with companies you have a genuine interest in and those that have products that you understand. For example, if you recently purchased a Tesla and enjoy driving the car, it might make sense for you to do some research on Tesla and determine whether it’s a stock you might want to purchase.

There is no “right” way to research stocks, but we recommend starting with the company’s financial statements. Public companies are required to disclose certain financial information, which is helpful to potential investors. Within financial statements there is a section titled Management Discussion and Analysis, which we recommend reading. This section is where management of the company discusses their interpretation of the financial statements, legal issues, future plans, and much more detailed information on the company. While reading this section you’ll want to keep in mind that its prepared by the company itself, meaning you’ll be reading a biased interpretation of the company’s financial position. It’s important to also read analysis that is critical of the company and its operations in order to be better informed.  

After reading the company’s financial statements, we would suggest you perform additional research. While there is no exhaustive list, here are some things that might help better inform you about stocks:

  • Read recent news about the company
  • Learn about the industry the company operates in
  • Listen in on investor calls
  • Keep tabs on the company’s competitors
  • Subscribe to podcasts that cover the area that the company operates in
  • Learn about the management team and their respective backgrounds  

Step 5: Select How Many Shares to Buy

When deciding how many shares to buy, it’s a good idea to ask yourself how much capital you’re willing to risk relative to your total portfolio. Common recommendations by industry-experts often recommend no more than 10% of your total portfolio be invested within individual stocks, with the bulk of your assets being invested in mutual funds and etfs. It’s a good idea to always take your total portfolio into account rather than just the investment in front of you; after all, we’re taking a long-term approach to investing here.

Of course, you should purchase as many shares as you feel comfortable with, just remember to take your overall investment strategy into account. You’ll likely want to start with just a few shares if you’re a new investor. By purchasing just a few shares, you can put some skin in the game, but not put yourself at too much financial risk. Once you’re more comfortable with the investment process and your overall strategy, consider purchasing more if it aligns with your overall goals.

If you’re an investor with limited investment income, there are some online brokers that allow customers to purchase fractional shares in companies. The benefit of this feature is that it allows you to buy stock in a company that might have otherwise been out of your price range. For example, let’s say you wanted to buy stock in Amazon, but were unable to because you only had a few hundred dollars at your disposal. The value of stocks fluctuates, but Amazon’s stock price has been in the thousands of dollars for a few years now. Fractional shares would allow you to own a piece of one Amazon stock. While there are some tradeoffs to this approach, it shows that you don’t need to have a lot of money to get started investing.

Step 6: Choose Your How You Order Your Stock Purchase

There are several ways to purchase stocks, but the most common ways are market, limit and stop-loss orders. There are many more types of stock market order types, but as a beginner we recommend sticking with market or limit orders. Many fortunes have been made on the stock market with simple buy/sell strategies, and placing fancy order types does not guarantee success by any means.

Below, we outline the key differences between the three most common types of orders, but again we recommend limiting yourself to market or limit orders to start.

  1. Market Order: You purchase stock at the current price. For example, Company X’s stock price is $30 and you purchase at $30.
  2. Limit Order: You purchase stock at a specific price or a lower price than specified. For example, Company X’s stock price fluctuates from $20 to $30 and you place a limit order at $23. Your purchase will only occur if Company X’s stock price hits $23 or lower after you place your order.
  3. Stop Order: You purchase stock at the current price only after a specific price is reached. Company X’s stock price fluctuates from $20 to $30 and you’d like to purchase shares since you believe the stock will rise to $100 shortly after reaching $31. You purchase a stop order to enter a trade at $31 so you don’t have to monitor the stock until it reaches $31. If the stock never reaches $31, you won’t buy the stock. 

FAQs About Buying Stock Online