How To Buy Stocks For Beginners: 5 Easy Steps

Updated: May 05, 2022By: Michelle Jones

To buy a stock, investors should open a brokerage account, select a company, and purchase the stock. The stock represents fractional ownerships, allowing investors to benefit when it performs well.

Stock market in the form of cubes with the image of stock quotes and the word buy on a digital abstract background. 3d rendering.
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What is a Stock?

Also known as equity, a stock represents a fraction of ownership in a company. It's essentially a small piece of the company usually referred to as a share. Every share you own entitles you to a small percentage of the company's profits and assets.

When you buy a stock, you become a partial owner of the business. Companies issue and sell stock to raise funds for general corporate purposes or for other uses.

Tip: Stocks are small pieces of a company broken down into shares and usually bought and sold on stock exchanges.

How To Buy Stocks in 5 Steps

Stocks are mostly bought and sold on stock exchanges like the New York Stock Exchange and the Nasdaq. However, some companies do private placements of shares for various reasons. You would usually go through a broker or an online trading platform like Robinhood when you learn how to buy stocks. There are several different types of brokers to choose from, and there are many online trading platforms, although each offers various features.

Step 1: Choose a Broker

When selecting a broker, you can choose from online brokers, discount brokers with assistance, money managers or robo advisors. Learn more about each below.

Online Brokers

They are the easiest to access because you can do so from the comfort of your own home. However, they require you to take care of all aspects of your trades, which means you have to do a lot of research about the stocks you're thinking about buying. Various online brokers may offer different features, so you'll need to do some research about multiple brokers before deciding on one that fits your needs. Some examples of online brokers are TD Ameritrade, Interactive Brokers and E*Trade.

Discount Brokers with Assistance

Many online brokers are also discount brokers because they offer trades for $0. One of the most popular discount brokers is Robinhood. Such brokers may offer some level of assistance, but they mostly just execute trades for clients. You should look at the features offered by various discount brokers before deciding which one is right for you.

Money Managers

Independent money managers do much more than just execute trades for clients. They provide even more advice than a full-service stockbroker does. Additionally, they don't have sales quotas they have to meet, so they are more likely to provide advice that's in your best interest. Some money managers only accept high-net-worth individuals, although others do accept those who aren't.

Robo Advisors

Robo advisors differ from all the other options already listed because they automate trades using computer algorithms. They will build you a portfolio based on your inputs and then execute those trades for you. All you need to do is answer some questions about your goals and risk tolerance, and the robo advisor will do the rest.

Tip: Learning how to buy stocks usually involves signing up for an online brokerage account, but make sure to do your research before you buy anything.

Step 2: Research Each Stocks

Before buying any stocks, you should research them to make sure they are a good buy. It might seem daunting to research a stock, but when you know how to get started, it becomes easy.

1. Review Financial Statements & Forms

The best place to start is with the company's Form 10-K and Form 10-Q. The 10-K is the company's annual report containing independently audited financial statements. It enables you to review the firm's balance sheet, its income sources, how it manages cash, and its revenue and expenses. The 10-Q is the company's quarterly update on its financial results and operations.

You should also look for consensus earnings numbers to compare with the numbers from the 10-Q to find out whether the firm has been beating expectations, performing in line with them, or missing estimates. Seeking Alpha offers consensus numbers under the "Earnings/ Earnings Estimates" page for covered stocks.

This practice will help you identify underperforming companies. One earnings miss can present a buying opportunity when a stock pulls back, but a trend of misses can signal serious problems with the business.

2. Review Company Revenue

You should also look at the company's revenue, including its:

  • Sales
  • Net income: how much it made after expenses
  • Adjusted or non-GAAP (generally accepted accounting principles) or GAAP earnings: these numbers remove one-time items or things like stock-based compensation. Consensus numbers are for non-GAAP results.

On the company's filings, you should also pay attention to the risk factor section because it will give you a good overview of the sector the company operates in and the industry-wide and company-specific risks it faces. Beyond a company's filings, it's a good idea to look into its price to earnings (P/E) ratio, return on equity and return on assets.

3. Review Data on Brokerage Platforms

New investors might feel a bit overwhelmed when reviewing company filings, so there is an easier way to research stocks. Most brokerage platforms allow investors access to their research and analysis, although with some platforms, you might have to pay for it.

It won't provide as much depth as looking at the filings, but you should be able to get a good idea of where the company stands and find some analysis of those filings to help you interpret them. Seeking Alpha also offers stock research, so that can be an alternative to the research offered by brokerage platforms, and it can be more in-depth than brokerage research.

Step 3: Choose How Many Shares to Buy

After researching a stock and deciding that it would be a good company to own, you have to decide how many shares to buy. Part of this decision depends on:

  • How much money you have to invest
  • The price of the stock

Another factor involved in deciding how many shares to buy is diversification. You don't want to just own just one or two stocks because you need to diversify. When one set of stocks is going down, hopefully another set is going up, so you have to own a variety of stocks instead of staying all within one sector or type of company. A diversified portfolio for a beginner should contain at least 10 to 15 different stocks.

Important: Even though a stock trades at an amount that allows you to buy a lot of shares of easily, it might not be a good company to own. You should refer back to your research to determine what the company's stock should be worth and then look for stocks that are trading at less than what they are worth.

Fractional Shares

If you think a stock like Tesla would be good to buy, you might not be able to afford an entire share because the price is so high. However, you can make fractional share purchases with many brokers, which means you buy part of a share. Most brokers offer fractional share purchases.

Step 4: Decide the Order Type

Buying a stock isn't as simple as buying a set number of shares. You also have to decide the type of order you want to enter on each stock.

1. Market Order

The most basic type is a market order, which is an order to sell or buy immediately at whatever the best possible transaction price is.

However, because of how the market works, your order might not be executed at the last-traded price. In the case of volatile stocks, the price is changing so rapidly that you might not get the most recently traded price. The key is that a market order represents the immediate buying or selling of a stock.

2. Limit Orders

Limit orders, also known as pending orders, enable investors to sell and buy stocks at a certain price in the future. This enables you to set up an order to buy a stock once it falls to a certain price. If you like a company but its shares are overvalued, you could set a limit order to buy on a pullback.

There are four types of limit orders:

  • Buy limit order: a form of bid and an order to buy a stock at or below a certain price
  • Sell limit order: an order to sell a stock at or above a certain price.
  • Buy stop order: will purchase a stock at a price above the current market bid
  • Sell stop order: an order to sell a stock for less than the current market ask.

Note: Two other terms that are important to understand are bid and ask. The bid price is what someone is willing to pay for a stock, while the ask price is what someone is willing to sell a stock for. A limit order places a limit on what you are willing to pay or bid for a stock.

3. Stop-Loss Order

A stop-loss order differs from the other types of orders because it lies dormant until the stock falls to a certain price. This type of order is useful for investors who can't watch the market all the time because it offers protection from steep downside moves.

Other Order Types

  • All or none order: requires you to get exactly the number of shares you requested in order for it to be executed
  • Immediate or cancel order requires that if an order is partially filled within a set amount of time, the rest of the order is canceled
  • Fill or kill order combines an immediate or cancel order with an all or none order, meaning that it requires that the entire order be traded in a few seconds in order for it to be executed
  • Good 'til canceled (GTC) order sets a time restriction on various orders, while a day order is a good 'til canceled order that lasts only a single day
  • Take profit or profit target order closes out a trade at a profit after it reaches a particular level

Step 5: Review Your Stock Portfolio

As you continue to hold various companies, you should stay on top of their filings and make sure they continue to flourish and don't take a turn for the worst. You should also make adjustments as one stock rises in value by taking some profits and selling some shares to buy something else. If one stock has been doing much better than the others, your portfolio will become less diversified.

Diversification is important because it ensures that you're not putting all your eggs into one basket. Some sectors may be better than others, but you should still create hedges in your portfolio to protect against risk. Hedges are small positions taken to limit the negative impact of the rest of the portfolio. The way you invest and use diversification will be different depending on whether or not you are investing or trading.

How to Buy Stocks Without a Broker

Most investors will turn to an online brokerage when they learn how to buy stocks, but some prefer to buy stocks without a broker. Learning how to buy stocks without a broker involves entering into direct stock plans. Such plans were created to enable businesses to sell shares directly to smaller investors. The company will set a minimum investment which is sometimes lower than the price of a single share.

The big advantage of buying directly from a company is how easy it is to learn how to buy stocks. Just send the money to the right place, and you get your shares. With direct stock plans, you will also have better communications with the company. On the other hand, they allow you to only buy shares from a single company, while brokerage accounts let you buy from multiple companies.

Additionally, direct stock plans can sometimes be more expensive than buying through a commission-free brokerage, and they can make it difficult to time your trades. It's not so easy to cash out and sell your shares.

This article was written by

Michelle Jones profile picture
317 Followers
Michelle Jones is editor-in-chief for ValueWalk.com and a daily contributor for ValueWalkPremium.com and has been with the sites since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She lives in the Chicago area with her son, dog and two cats.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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