If you’re reading this, you’re probably brand new to the stock market and want to know how to buy stocks.
Maybe you really like a company and want to own shares or you got a hot stock tip from your Uncle at a holiday gathering.
Either way you need to understand the steps required in order to buy your first shares.
In this guide we’ll cover the basics from setting up a brokerage account, placing orders as well as some tips on how you can make money with stocks.
How To Buy Stocks Primer
When a regular Joe like you or I wants to buy or sell shares, we don’t typically go straight to the stock exchange to find someone to transact with.
We find an online stockbroker who holds our money and buys stocks on our behalf when we enter orders.
Because buying and selling stocks directly through a stock exchange requires sophistication and technology, stock brokers act as a middleman in the transaction in the same way that a real estate or insurance broker does.
Sure, when we’re looking for a new homeowner’s insurance policy we can go directly to all of the insurance firms like Geico and Progressive, talk to their staff, negotiate quotes and such, or we can give all of our info to an insurance broker.
Because of their expert status, they know how to find us the best deal on insurance that fits our financial needs.
A stockbroker takes care of all the politics that takes place in between us wanting to own a stock and actually owning it.
We deposit money into our stock broker account, simply make an order to buy shares in our favorite company, and move on with our day.
So how do we find a stockbroker, how do we know which type of brokers to trust, which ones are best suited to your needs, etc.?
Choosing a Stock Broker
There are tons of stockbrokers out there competing for your business.
Some cater to highly active day traders, who buy and sell shares of stock in the same day to make profits.
In contrast, others cater to long-term investors who just want to buy some shares and leave them for their retirement.
If your needs aren’t complicated, they’re probably met by one of the top discount brokerages, which basically serve as one-stop shops. They do a little bit of everything to serve the needs of everyday investors.
So if you want to buy some stock for your retirement account, but also speculate a bit on a hot stock, you can do both with these types of brokers.
Some of the most popular full service brokers are:
Or you can look at app based brokers that offer free commission like these two popular ones:
The brokers above will take care of most of your needs as an individual trader or investor, whether you want to start day trading, swing trading, trading options, or trading futures in the future.
All of the above brokers offer free software to clients, which will help you look for trading/investing ideas, analyze trading opportunities, and research stocks.
How Do Stock Brokers Make Money?
Stockbrokers used to charge you a fee (referred to as a ‘commission’) for each trade you place. Back in the 1970s, these fees were high, often north of $50 for each trade you place, even if you just buy a couple of shares.
As competition increased and technological changes disrupted the industry, fees got cheaper, and just last year, trading commissions went to zero for most online brokers.
The leading way stockbrokers make money nowadays is through earning interest on the idle cash sitting in your trading account or through order flow to market makers.
Let’s say you fund your brokerage account with $10,000, and you buy $2,000 worth of shares.
The broker will put that uninvested money in a money market account, only paying you a portion of the interest, keeping the rest for themselves.
This is why brokers can afford to let you trade for free while giving you free software and other perks like 24/7 customer support.
Order flow is when brokers receive money from market makers on the exchanges by sending your orders to them. This has become more common as more brokers move to commission free business models.
Placing Your First Order
So you decided on a broker and have funded your account, what next?
Now it’s time to buy your first stock!
You’ll need to find out what the ticker (symbol) is for the company you wish to buy. It is usually 2 to 4 letters long and is unique for each company, which is used for transacting orders.
For example, if you wanted to buy shares in Netflix, their ticker symbol is $NFLX.
You can find ticker symbols on financial outlets like MarketWatch.com or Yahoo Finance.
If you wanted to buy shares of Netflix, you would log in to your brokers trading software and go to the order window.
This can look different depending on the broker you have but they all have buy/sell options, type of order you want to place, how many shares you want to purchase with others have more detailed information like choosing your route, advanced orders among other things.
Below is a more advanced order window:
Once you pull up a quote on the stock you want to buy, you need to check the bid and ask prices (bid represents the buyers, ask represents the sellers and the difference between the bid and ask is called the spread).
You have two options: you can either purchase shares at the current market price or enter an order to buy shares if the prices drop to a certain level.
A market order will auto fill you at the best available Ask price when your order hits the exchange.
Quick tip: We typically don’t recommend market orders because you leave it up to the exchanges to where you’ll get filled at while if you place a limit order you can only pay up to your limit price and no more.
In the above order window Netflix is trading $128.69 on the Bid and $128.72 on the Ask, but say you don’t want to pay more than $125 per share. You would place a buy limit order at $125.
This means you won’t buy shares unless prices drop to $125 or lower.
To break it down, you don’t have any control on the prices you will pay with a market order.
With a buy limit order the most you will ever pay is the limit price you set.
For more information on the different order types, check out the links below:
Different Ways to Profit
The stock market has a diverse array of participants, from professionals who make billions per year by speculating on stock prices, to everyday folks who buy a few shares of their favorite company, to cowboy day traders who trade in and out of stocks daily, making profits from the small fluctuations in price.
We could write an entire article on how many different ways there are to profit from the stock market. Still, most participants can be reduced to two labels: traders or investors.
You’ve probably heard of Warren Buffett. He’s a long-term investor. When he buys a stock, he doesn’t care where the price goes tomorrow. He wants to hold the stock for decades, collecting profits slowly, but surely.
On the other hand, you have traders.
Traders capitalize on short-term price fluctuations. If you’ve been reading the news lately, you’ve probably read about oil prices going negative, or the coronavirus-driven stock market crash.
These situations are where traders thrive. When volatility and fear is heightened, traders take advantage of the irrationality and go with the flow.
You can check our guide to Day Trading Basics here to learn more about how day traders profit from price swings.
Buying stocks in today’s world is pretty straightforward. All it takes is signing up for a stock brokerage, and filling out an order ticket to buy shares of your favorite company.
Most brokers have apps or desktop applications to enable you to purchase stocks from anywhere. But don’t let the simplicity fool you. Winning in the stock market takes hard work and education.
If you’d like to learn more about day trading and the stock market, then make sure to join our next FREE webinar by clicking the link below!