How to Buy Stocks [Three Ways to Do It & Essential Terminology]

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If you are a beginner in the stock market, you might be apprehensive about buying stocks. But with thorough research, you can gain familiarity as to how to buy stocks. This article addresses the basics and most essential aspects of buying stocks.

What Are Stocks and How Do They Work?

Stocks are investments in the profit of a company. Investors purchase stocks to earn a return on their investment. Buying stocks is a way of building wealth. Your investment ensures a share in the company that issued the stock.

Stocks are also used as a tool for raising money to fund growth or other initiatives for companies. For example, when a company sells stocks, it invites investors to buy a percentage of its ownership (or equity), making them part owners.

NOTE: Around 10% of American households hold international equity.

How to Buy Stocks

You’ve done your research and are ready to invest. Now you can check out several ways to buy stocks.

Full-Service Brokerage

A full-service brokerage is a brokerage firm or a licensed broker-dealer that provides many services for its clients and offers a wide range of products. The brokerage firm executes large trades for its clients and provides such services as research and portfolio, tax assistance, retirement planning, investment advice, and estate planning.

Full-service brokerages also offer personalized services for clients. For example, they arrange handholding for clients, reassuring them that they’ll execute their trading. As a result, investing with a full-service brokerage can be the easiest way to buy stock but not the cheapest.

If you decide to work with a brokerage firm, you need to submit an account application at the brokerage firm. Then, a representative (financial advisor, account executive, or registered rep) will be assigned to you. The representatives have a securities license and are knowledgeable about investing and stocks in particular.

But this way of investing can be pricey because of the complexity of the services, commissions, and representatives fees.

Robo-Advisor

If you’re wondering how to buy stocks online, Robo-advisor—also known as an online advisor or automated investing service—is your choice. This service makes it easier to plan your financial goals by assisting with investments at low cost and low (or no) account minimums.

A Robo-advisor service uses advanced software and computer algorithms to build and manage its clients’ investment portfolios. Its services range from tax optimization to automatic rebalancing. If you choose Robo-advisors for stock purchasing, you need to know that they don’t require almost any human interaction. But they do have personal advisors available to respond to your doubts or questions.

Generally, Robo-advisors have low or no minimum requirements, which is why their costs are low and allow you to get started quickly—sometimes within a matter of minutes.

If you decide to invest with a Robo-advisor, you can choose one of the best Robo-advisor companies here.

Direct Stock Purchase

Another option for investors is a direct stock purchase plan (DSPP). How do direct stocks work? DSPP enables individual investors to buy stocks directly from a company without broker intervention. Part of these companies make plans instantly available to retail customers; others use third-party administrators or transfer agents to manage the transaction. These plans sometimes offer the ability to buy shares at a discount and low fee.

Not every company, however, offers a direct stock purchase plan. This kind of purchase might come with certain restrictions about when an individual investor can buy shares. But DSPs still have advantages for long-term investors who don’t have much cash to get started.

NOTE: In 2020, the total Robo-adviser market size amounted to $987 billion.

Research Companies and Stocks

Researching stock will help you evaluate the company and determine where to buy stocks and whether that company is worth adding to your portfolio. There are many types of stock, but we’ve noted three of the most common ones.

Value Stocks

A value stock is a company’s shares that trade at a lower price relative to its fundamentals, such as earnings, dividends, or sales, making it appealing to value investors.

Most stocks are classified as growth stocks or value stocks. Typically, value stocks trade for valuation under that of the average stock in S&P 500 companies. As a result, value stocks are more conservative investments and undervalued in the stock market. But investors see potential to buy individual stocks.

Dividend Stocks

Dividend stocks could be an excellent choice for investors searching for regular income. As part of the company’s profit, companies pay out dividend stocks to particular shareholders regularly. These companies are generally well established, with secure earnings and a long track record of sharing some of their profits back to shareholders.

These distributions are usually paid quarterly as additional stock or in cash. But some companies have the practice of transferring funds annually, monthly, or once in the form of a special dividend.

Even though purchasing dividend stocks may assure you regular payments, they can be cut in difficult economic times to preserve cash flow.

Growth Stocks

These types of stocks can have higher levels of risk, but potential returns could be quite attractive. Growth stocks refer to companies that build their earnings and revenue faster than the average business in their industry or stock market as a whole. But growth investing strategies require more than acquiring stocks that are going up.

Typically, growth companies develop an innovative service or product that acquires shares in existing and new markets or creates new industries. As a result, a company that can grow faster than the average for more prolonged periods tends to be rewarded by the market—which can be a great place to buy stocks because it provides exceptional returns to the shareholder. But, of course, if they grow faster, returns will be more significant.

Purchasing Shares

How to buy stocks includes how many shares you want to buy, which depends on how much money you want to invest, the commission fee, the cost of the shares, and the risk tolerance. The best way to buy stocks is to determine what suits you best.

Stock Orders

There are four types of stock orders that you need to be familiar with when deciding to invest.

Market Order

The primary type of trade is called a market order—an order to buy or sell stock at the best current price on the market. If you buy stock, you pay the price at (or near) the posted ask. But if you’re selling stock, you receive the price at (or near) the posted bid. (The last traded price isn’t automatically the price the market order will be executed.)

Limit Order

A limit order (or pending order) enables investors to purchase or trade securities at a specific price in the future. A limit order is used to execute the trade if the price stands out at the predefined peak—it sets a minimum or maximum price at which the investor is willing to buy or sell stock.

Stop Limit Order

This order limits the price at which they’ll execute. For example, there are two prices specified in a stop-limit order: a stop price (which converts the order to a sell order) and a limit price. This type of order provides excellent control to investors by determining the minimum or maximum prices for each other.

Stop Order

A stop order sells and buys a stock anytime the stock price reaches a specific price, known as the ‘stop price.’ The stop order stays passive until this price is attained. When the price is achieved, the stop order converts to a limit order or market order, and your order is placed.

Additional stock purchasing order types that you can find are All Or None (AON), Good For Day (GFD), and Good Till Canceled (GTC).

Portfolio Diversification

Diversification is the key to intelligent investment. It helps you minimize the risks while investing in the long term.

  1. Ensure that your portfolio has specified investments by purchasing a portfolio of ETFs, mutual funds, or index funds.
  2. Diversify inside the individual types of investments. Choose investments with specified rates of returns.
  3. Think about investments with varying risks. Choose investments with diverse rates of return, such as foreign stocks.
  4. Rebalance your portfolio at least two times per year.

If you wish to succeed in the stock market, you need to be attentive and manage regularly.

Key Takeaways

Stocks are investments in a company and its profits. Investors purchase stock to earn a return on their investment. Purchasing stocks is a way of building wealth.
Value stocks, dividend stocks, and growth stocks are ways to buy stocks.
The most basic type of trade is a market order, which buys or sells stock at the best current market price.
Diversification is the key to intelligent investment.

Need-To-Know Terminology

If you decide to buy stocks and invest, you need to be familiar with all the essentials—especially how to buy stocks without a broker. The easiest way to buy a stock is to be well informed about the following:

  • Earnings-per-share (EPS) is a company’s profits (net income) divided by the number of shares outstanding.
  • Price/Earnings Ratio (P/E ratio) informs investors about the value of the company. It is the relationship between the earnings per share and the company’s stock price.
  • Dividends are payments made by publicly-listed associations as a reward to investors for placing their money in their venture.
  • Revenue growth is the increase/decrease in a company’s sales amid two consecutive periods. It’s shown as a percentage revenue growth and demonstrates the degree to which your company’s revenue has increased or decreased over time.
  • Historical price helps determine the value of the company and its growth potential.
NOTE: September is the month in which the stock market usually performs the worst.

Conclusion

Buying stocks online and investing is possible, even if you’re starting with a small sum of money. But you need to be aware of the restrictions you’ll face as a new investor. For example, you need to find the minimum deposit conditions, compare the commissions to other brokers, and choose a broker to open an account with.

FAQ

How can I buy $500 stock?

First, choose an investment account, such as an IRA, which you can open with each Robo-advisor or online broker. Second, do you prefer hands-on or hands-off investment? If you want someone to invest this money for you, it’s advisable to pick up a Robo-advisor.

Is now a good time to buy stocks?

Advisors say that no matter what is happening in the markets, it’s always a good time to invest if you’re planning to invest in the long term.

How do beginners buy stocks?

How to buy stocks is a concern for beginners. First, get started with an online brokerage account. Then, choose if you want to work with full-service brokerages or with a Robo-advisor.

Sources

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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