How To Buy Stocks: A Beginner’s Guide
Have you been contemplating purchasing stocks but have never been able to determine how to go about purchasing stocks? Buying stocks and trading them can be an incredibly lucrative way to build up wealth over time.
According to estimations, it is believed that by investing $500 in stocks, you could be a millionaire in 33.42 years. Yet, by investing $5,000 in shares, you could be a millionaire in as little as 10.67 years.
Of course, these estimations are dependent on if you learn how to buy stocks correctly and if you learn which stocks to invest in that will earn you the most profitable return possible. Having a solid foundation in stocks by learning how to buy them will allow you to have a higher chance of success when you’re ready to undertake a stock market trading venture.
Although there is much to know about investing in stocks, we have managed to summarize the most important information you need to become acquainted with in this simple beginners guide.
We will look at everything from what exactly stocks are, why the prices of stocks fluctuate, and the various vital steps you need to take to purchase stocks and begin trading. Hopefully, after reading this stock buying guide, you will better understand how you can use stocks to become wealthy over time.
What Exactly are Stocks?
Before we can look at how to buy stocks, it’s important to fully understand what stocks are. Essentially, stocks are equity investments. These equity investments allow you to demonstrate legal ownership in companies of your choosing. This means that when you purchase shares in a company, you are becoming a part-owner of it.
There are primarily two different types of stocks that a person can own, and they are known as preferred stocks and common stocks. Preferred stocks have a predetermined dividend amount that a shareholder can earn. On the other hand, common stocks give shareholders a proportionate share of a business’s losses or profits. Most beginners will want to invest in common stocks as it allows for a higher likelihood of attaining large profits.
Why Do Stock Prices Fluctuate?
With the stock market, buyers can be governments, corporations, small businesses, and individuals. Generally, stock prices fluctuate based on interest and performance. When many people are selling a particular stock, it will be cheaper to buy that stock. Yet, when more people are interested in buying a particular stock than there are sellers, it will be more expensive to buy that stock.
Interestingly, a company’s performance is not the thing that influences its stock trading prices. The investor’s reactions to how the company has performed determine how much a stock will cost, which influences how its price fluctuates.
The Seven Steps You Need To Take To Buy Stocks
Below are the seven most important steps you need to be aware of if you are considering purchasing stocks. Should you decide to follow these beginners steps, you will likely find the stock buying process simple and somewhat less complicated.
Step One: Determine What Type of Stock Investor You Are
The first step towards buying stocks is determining what type of stock investor you are. To determine the type of stock exchange investor you are, you need to first evaluate how much time you have available for investing.
You then need to establish what your tax bracket is, if you have any time constraints, what your risk tolerance is, and what your financial goals are. Once you have the answers to these questions, you will have to choose between two different investing approaches.
- Passive Investor: A passive investing strategy takes a buy-and-hold approach. This type of strategy is used by those who want to buy their stocks and hold onto them for as long as possible. With this strategy, you don’t focus on timing the market to sell stocks quickly. Essentially, as a passive investor, you are choosing to take the reins in your investments to maximize efficiency over time. As a passive investor, you are choosing to conduct your stock buying on your own without the assistance of a professional stock advisor or agency.
- Active Investor: Unlike passive investing, active investing is a strategy that focuses on buying and selling stocks based on market conditions. As an active investor, you can choose to buy and sell stocks on your own, or you can choose to utilize a professional to manage your investments. The active investment approach is used by those hoping to maximize their profits by frequently purchasing and selling stocks during specific points in time.
Step Two: Learn the Ways You Can Invest in the Stock Market
When you have decided you want to buy stocks, it’s important to learn the different ways you can invest in stock. Below we have provided a brief explanation of a few ways you can invest in the stock market.
- Mutual Funds: If you’re worried about purchasing stocks on your own, you might want to invest through mutual funds. This stock market investment option allows investors to combine money resources to buy various stocks. However, it’s crucial to note that should you choose to buy stocks this way, they will have to be actively managed by a fund manager.
- Robo Advisors: In recent years, choosing to buy stocks through a robo-advisor has become increasingly popular. Simply put, a robo-advisor is a brokerage that buys and invests in stocks on your behalf. A robo-advisor will invest in a portfolio of index funds based on your age, investing goals, and risk tolerance.
- Index Funds: When you don’t want to buy individual stocks, you can purchase stocks in index funds. An index fund is a stock index like the S&P 500, and this type of investment option can prove to be lucrative in the long run. In general, index funds usually exhibit lower costs and are almost always guaranteed to match the long-term performance statistics of their underlying indexes.
- Individual Stocks: If you have time on your hands, buying individual stocks is an excellent option. However, deciding to invest in individual stocks requires extensive research and frequent evaluation.
Step Three: Choose the Type of Investing Account You Feel Comfortable Opening
Once you have made the decision of how you would like to buy and invest in stocks, you need to determine what type of investing account you feel comfortable opening. If you have chosen to be a passive investor who is actively involved in purchasing stocks or an active investor, the below types would be excellent investment account options, especially for beginners.
However, remember that when choosing the type of investment account you want, you need to choose one that fits your goals, investment strategy, and budget.
Active and Passive Investor Account Options
- Fidelity – Brokerage
- Vanguard – Brokerage
- Public – Individual Investors
- Wealthfront – Robo-advisor
- Betterment – Robo-advisor
Step Four: Establish How Much You Want To Invest in Stocks
When you are establishing how much you want to invest in stocks, you need to remember not to use money that you will need within five years. There is much uncertainty in the stock market, and the price of shares is going to fluctuate.
You don’t want to invest in stock with money you need or will need within five years as there is always a chance you could lose it all. If you are not sure how to determine how much money you should use to buy stocks, you need to consider the below prompts:
- Your monthly expenses
- How much debt do you currently have
- Your financial goals
- What your current net worth is
- The amount of time you have available to dedicate to investing in stocks
- Your current risk tolerance
Additionally, another important aspect of stock trading to keep in mind is that you will need to establish how much money you need to invest in stocks. How much you will need will ultimately depend on how much the shares you are interested in buying are worth. The costs of shares can range dramatically, but sometimes you can purchase shares for as low as $100.
Step Five: Conduct Research on the Stocks You Are Interested in Purchasing
An incredibly important step in your stock buying journey will revolve around researching the stocks you are interested in. If you choose the wrong stocks due to a lack of research, you stand a much higher chance of losing the money you have decided to invest.
In general, the best place to begin your research is to choose companies that you know and like and start researching them. When researching these companies, try not to let the data and market estimations and statistics overwhelm you.
One of the documents you need to research and evaluate is a company’s annual report and annual management letter to shareholders. This report and letter will provide you with an overview of what has been happening with the company.
However, if you are struggling to understand the various market indicators and statistics, it might be beneficial to utilize the services of a professional who understands stock trading. With the help of a brokerage firm, you will have access to numerous analytical tools such as conference call transcripts, SEC filings, tutorials, and quarterly earnings updates. These tools are hugely beneficial in helping determine which stocks you should purchase.
Step Six: Determine How Many Shares You Want To Buy
You need to remember that you don’t need to buy a certain number of stocks to fill your whole portfolio at once. It’s best to build your investment portfolio over time as it is less risky and provides you with the opportunity for growth.
When you are a beginner stock trader, you need to start small by buying a single share or two. It’s usually best to try out buying individual stocks first while you learn the trading process. Another excellent shares option for beginners is buying a few fractional shares.
These types of stocks are small portions of a share. A few fractional shares make up an entire stock. Fractional shares allow beginners to become part owners of large companies where entire shares are usually too expensive to purchase.
Step Seven: Learn To Sell Stocks
Although buying stocks is the most important thing to understand when learning how to invest, it’s also important to learn how to sell stocks. If you are a beginner, you might be tempted to buy when the stock market is rising and sell shares when it is falling.
You need to try and avoid this and instead follow a buying and selling strategy that focuses on your financial needs and goals.
That’s How To Buy Stocks!
As with most things in life, learning to buy stocks can be a daunting and challenging task. Yet, hopefully, you now have a much better idea of how to buy stocks as a beginner. By following these stock purchasing steps we outlined in this article, you will be on a steady trajectory towards earning the wealth you desire. Just remember that you must avoid investing money you can’t afford to lose, and always be prepared to lose the money you invest.
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