Stocks are an important part of any investment portfolio. Compared to other investments, they offer a relatively high average rate of return. In fact, from 1928 – 2021, the S&P 500 averaged returns at a rate nearly double that of bonds and nearly triple that of real estate (11.94 percent, 6.21 percent, and 4.4 percent, respectively).
While buying stocks may seem confusing if you’ve never done it before, it doesn’t have to be. Here’s how to buy stocks in five simple steps.
Table of Contents
- Open an Account To Buy Stocks
- Decide How Much To Invest
- Research Stocks To Buy
- Place Your Order
- Track and Manage Your Portfolio
1. Open an Account To Buy Stocks
When buying stocks, you will almost always need a brokerage account. A brokerage account is similar to a bank account — it’s a place where you allow a financial institution to manage your money on your behalf. The big difference is that brokerage accounts don’t just hold your money, they invest it on your behalf to help your money grow.
How brokerage accounts will invest your money depends on what kind of brokerage you use and your preferences.
Full-Service Brokerage
A full-service brokerage offers a range of financial services, including:
- Retirement planning
- Tax preparation
- Estate planning
- Investing in the stock market
With a full-service brokerage, a human broker will ask you about your investing style, including goals, risk preferences, and how long you plan on investing. Your answers to these questions will inform how your brokerage invests your money. Some, but not all, brokerage accounts allow you to directly choose the stocks or securities you’d like to invest in.
While full-service brokerages offer ample financial help, they usually charge more expensive commission fees.
Robo-Advisor Account
If you don’t need additional financial services outside of buying stocks, you may prefer opening a robo-advisor account through a service like Betterment. These accounts aren’t operated by a human broker. Instead, an automated questionnaire will ask you questions about your investment preferences and use a clever algorithm to find investment opportunities that match them.
These accounts are usually less expensive than full-service brokerages but may not offer as much customized help.
If you want some of the advantages of a full-service brokerage and some advantages of a robo-advisor account, you can opt for a hybrid brokerage. These brokerages partially use human financial advisors and partially use robo-advisors.
Direct Stock Purchase Plan
Most of the time, investing in the stock market requires opening a brokerage account. However, if you know what stocks you’d like to invest in, you may be able to purchase through a direct stock purchase plan rather than a brokerage account.
Direct stock purchase plans allow you to purchase stock directly from the company or their transfer agent rather than through an investment account. Not all companies participate in direct stock purchase plans.
Unlike most online brokerage accounts, direct stock purchase plans usually charge fees when buying and selling shares. This tends to make them a less popular option. However, sometimes direct stock purchase plans allow investors to purchase stocks at a slight discount, which may make up for additional fees.
2. Decide How Much To Invest
Once you’ve opened an account to buy stocks, the next step is deciding how much you’d like to invest. You’ll want to consider both initial investment costs as well as a long-term budget.
- Initial investing costs: This number includes any setup fees associated with your brokerage or direct stock purchase plan, as well as your first investment amount. This can be as large or small as you want.
- Long-term investment budget: This number includes how much money you’d like to invest on a monthly or yearly basis to help grow your investment portfolio. If you have certain monetary goals, you can use Mint’s investment calculator to estimate how monthly contributions may affect your overall returns.
When investing over time, consider using dollar cost averaging. This strategy involves investing equal amounts of money at regular intervals to average out your buy-in cost.
3. Research Stocks To Buy
After deciding how much you’d like to invest both initially and in the long term, the next step is researching which stocks to buy.
With so many different types of stocks out there, knowing what stock to invest in can feel overwhelming. It can help to start with the basics. In general, there are three different ways you can invest in stocks:
- Individual stocks: Buying individual stocks grants individual investors a certain amount of equity in a company. For example, if you buy 100 shares of Coca-Cola, you own a small part of the company and can receive financial gain if the company grows.
- Funds: Funds pool money from multiple investors to purchase an array of investments like bonds, stocks, or even real estate. By investing in funds, like mutual funds, individual investors purchase a small portion of the shared investment portfolio. This means you would own small portions of an array of investments.
- Fractional shares: Fractional shares represent part of a whole stock. Investing in fractional shares can benefit investors who want to invest in expensive stocks but don’t have the capital to do so. For example, as of early October 2022, investing in Warren Buffet’s Berkshire Hathaway Inc. cost upwards of $400,000. Fractional shares can allow investors without the necessary upfront capital to invest in Berkshire Hathaway Inc. at a lower cost for a portion of a share.
If you’re still unsure how you’d like to invest, preferred stocks can be low-risk investments.
4. Place Your Order
Once you decide how much you want to invest and where, you’re ready to place your order. You’ll need to specify what type of order you’d like to place. While there are several different types of orders, in general, the two most common order types are:
- Market order: These orders tell your stockbroker to buy the specified stock immediately at the lowest available price. Keep in mind the price you see when placing the order may not be the price you end up paying. Prices on the stock market change from second to second.
- Limit order: These orders allow you to have more control over your buy-in price by placing a limit on what you’ll pay for a specified stock. The stockbroker will buy the stock only if it becomes available at or below your specified price within a specified time period. If the stock never becomes available to your specifications, the order will not go through.
In general, market orders are best for long-term investors who intend to buy and hold, and for whom small fluctuations in price don’t matter. Limit orders are generally best for buying stocks where prices fluctuate widely to ensure investors pay a price they’re comfortable with. This can include buying in more volatile markets.
5. Track and Manage Your Portfolio
After purchasing stock, track your investment portfolio to make sure it remains in line with your risk preferences and financial goals. While you may not need to keep an eye on your investments every single day, it’s particularly important to check your investments if your financial situation or goals change.
Additionally, purchasing stocks is only part of a larger investing strategy. After investing in stocks, you may want to explore different types of investments like bonds, CDs, or annuities. This can help you create a more diversified portfolio.
Managing your investment portfolio can feel overwhelming if you have several accounts, like a brokerage account and a retirement account. Mint makes this easier by allowing you to track investments all in one place. You can even see what your best- and worst-performing investments are with our performance-tracking integration to help you make more informed investing decisions.
FAQ About Buying Stocks
Have additional questions about buying stocks? Here are the answers to some commonly asked questions.
How Old Do You Have To Be To Buy Stocks?
In the United States, you must be at least 18 years old in order to trade stocks and other investments like mutual funds. If you are under 18 and want to begin investing, a parent can set up a custodial account on your behalf.
What Are the Best Stocks for Beginners To Buy?
Some of the best stocks for beginners to buy are:
- Dividend stocks: Dividends are regular payments to investors who own a share in company stock. Dividend paying stocks outperform non-paying stocks on average, with historical returns averaging 9.6% compared to the 4.79% of non-paying stocks.
- Preferred stocks: These stocks offer dividend payments to preferred stockholders. Common stockholders then receive payment from any leftover dividends.
- Large companies: Large, established companies can be safe investments because they are time-tested and usually in demand.
How Do You Buy Shares in a Company?
If a company is public, you can buy shares on the stock market. This involves opening a brokerage account, funding your account, and placing an order through your stockbroker.
If a company is private, you can still invest by joining an angel investing organization or partnering with a venture capital fund. While directly investing with the company is possible, this strategy is usually reserved for wealthy individuals who can handle more risk.
Do You Have To Pay Taxes on Profits Made From Stocks?
You will need to pay capital gains tax on profits made from selling stock. How much capital gains tax you will owe depends on your tax bracket, the difference in price between when you bought and sold, and how long you held the stock before selling. Dividends are also subject to taxation.
- Long-term capital gains apply to stocks you held for at least a year. Depending on your income and filing status, they will be taxed at a rate of 0 percent, 15 percent, or 20 percent.
- Short-term capital gains apply to stocks you held for less than a year. They are taxed at the same rate as your income tax bracket.
Ready to start investing? Open a brokerage account with one of our trusted partners today, or learn more about how the stock market works.
Sourcing
- S&P 500 average rate of return. Historical Returns on Stocks, Bonds and Bills: 1928-2021 (Jan 2022)
- Average returns of dividend paying and non-paying stocks. The Power of Dividends: Past, Present, and Future (2022).
The post How To Buy Stocks: A Beginner’s Guide appeared first on MintLife Blog.
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