How to buy and sell stocks? Explained in detail for beginners
Discover the ins and outs of stock trading, from buying to selling. Learn about market orders, limit orders, and more. Start trading with confidence.
Investing in stocks might appear intricate, but it's as simple as setting up an online investment account and buying stocks of the companies you fancy. However, achieving long-term wealth through investing involves more complexities.
How to buy stocks in 5 steps
To invest in stocks, start by opening a brokerage account and funding it. Then, you can proceed to purchase stocks through the platform. Choosing a broker is the initial step, so compare options to find the best one for your stock trading needs.
1.Choose an online stockbroker:
Opting for an online stockbroker is the simplest method to purchase stocks. Once you've opened and funded your account, you can swiftly buy stocks via the broker's website. Alternatively, you may consider utilizing a full-service stockbroker or directly purchasing stock from the company itself.
Setting up an online brokerage account is akin to establishing a bank account. You'll need to complete an account application, furnish proof of identification, and decide whether to fund the account by mailing a check or electronically transferring funds.
2.Conducting research on desired stocks
Once you’ve set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experiences as a consumer. Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You’re looking for companies of which you want to become a part owner. Warren Buffett famously said, “Buy into a company because you want to own it, not because you want the stock to go up.” He’s done pretty well for himself by following that rule. Once you’ve identified these companies, it’s time to do your research. Start with the company’s annual report — specifically management’s annual letter to shareholders. The letter will give you a general narrative of what’s happening with the business, and provide context for the numbers in the report. After that, most of the information and analytical tools that you need to evaluate the business will be available on your broker’s website, such as SEC filings, conference call transcripts, quarterly earnings updates and recent news. Most online brokers also provide tutorials on how to use their tools and even basic seminars on how to pick stocks.
3.Determining the number of shares to purchase
There's no need to rush or feel pressured to invest a significant amount of money in stocks right away. Consider starting with paper trading, using a stock market simulator, to gain experience without risking real money. Alternatively, if you're ready to invest actual funds, start with a small investment, perhaps just a single share. This allows you to gauge how it feels to own individual stocks and whether you can withstand market fluctuations. Over time, as you become more comfortable, you can gradually increase your investments.
Beginner investors exploring the stock market may find fractional shares to be a valuable option. This feature, available through various online brokers such as SoFi Active Investing, Robinhood, and Charles Schwab, allows investors to purchase a fraction of a stock rather than a full share. This means you can invest in high-priced stocks with a smaller initial investment. Additionally, many brokerages provide tools that convert dollar amounts into shares, aiding investors in determining the number of shares they can purchase with a specified amount, such as $500.
4.Purchase stocks using the appropriate order type for your needs
Don't be intimidated by the numerical data and unfamiliar terms displayed on your brokerage's online order page. Utilize this simple guide to familiarize yourself with essential stock-trading terminology:
| Term | Definition |
| Ask | For buyers: The ask price represents the amount that sellers are willing to accept for the stock. |
| Bid | For sellers: The bid price indicates the amount that buyers are willing to pay for the stock. |
| Spread | The spread is the gap between the highest bid price and the lowest ask price. |
| Market order | A market order is a request to buy or sell a stock immediately at the prevailing market price. |
| Limit order | An instruction to purchase or sell a stock at a predetermined price or a more favorable one. |
| Stop (or stop-loss) order | When a stock hits a predetermined price, known as the "stop price" or "stop level," a market order is triggered, and the entire order is completed at the current market price. |
| Stop-limit order | Once the stop price is reached, the trade converts into a limit order, and it gets executed up to the point where the specified price limits can be met. |
| Dollar-cost averaging | Dollar-cost averaging involves consistently placing market orders at regular intervals, such as buying stocks at the market price every two weeks, typically aligned with payday. This strategy aims to accumulate shares at an average price over an extended period. |
There are numerous advanced trading strategies and intricate order types, but you don't need to concern yourself with those at the moment, or perhaps ever. Many investors have achieved success in their stock trading endeavors using just two types of orders: market orders and limit orders.
Market orders
A market order involves buying or selling a stock at the current market price without setting any specific price parameters. Since a market order doesn't specify a price, it's executed immediately and completely, unless you're dealing with a massive volume. However, it might not be fulfilled if you're trying to purchase a thinly traded stock with low volume.
The price you pay or receive with a market order may differ from the quoted price just moments ago due to constant fluctuations in bid and ask prices throughout the day. Therefore, market orders are more suitable for stocks that have stable prices and don't undergo significant price swings, such as large, established blue-chip stocks, rather than smaller, more volatile companies.
Here's some useful information:
- For buy-and-hold investors, a market order is preferable because ensuring the complete execution of the trade is more important than minor price differences.
- If you submit a market order trade after regular trading hours, it will be processed at the prevailing price when the markets reopen.
- Review your broker's trade execution policy. Some low-cost brokers aggregate all customer trade requests to execute them simultaneously at the prevailing price, either at the close of the trading day or at a specific time or day of the week.
Limit orders
A limit order provides you with greater control over the price at which your trade is executed. For instance, if XYZ stock is currently trading at $100 per share but you believe it's worth $95 per share based on your valuation, a limit order instructs your broker to wait and execute the order only when the ask price drops to your specified level. Similarly, for selling, a limit order directs your broker to sell the shares once the bid price reaches your set level.
Limit orders are particularly useful for trading smaller company stocks, which often have wider spreads due to varying investor activity. They're also beneficial during periods of short-term market volatility or when the stock price is more significant than immediate order fulfillment.
There are various conditions you can attach to a limit order to control its duration. For example, an "all or none" (AON) order is executed only when all desired shares are available at your specified price limit. A "good for day" (GFD) order expires at the end of the trading day if it hasn't been fully filled. On the other hand, a "good till canceled" (GTC) order remains active until you cancel it or it expires, typically within 60 to 120 days or more.
Keep in mind:
- Although a limit order guarantees the specified price if executed, there's no assurance of full, partial, or any execution at all. Limit orders are processed on a first-come, first-served basis, after market orders are fulfilled, and only if the stock remains within your set parameters long enough for the broker to execute the trade.
- Limit orders may result in higher commissions for investors compared to market orders. If a limit order cannot be fully executed at once or during a single trading day, it may be filled gradually over subsequent days, incurring transaction costs each day. If the stock fails to reach your specified limit price by the order's expiration, the trade will not be executed.
Dollar-cost averaging
Dollar-cost averaging involves regularly purchasing stocks at the market price, such as investing a fixed portion of your income into an index fund every few weeks. Although not an order type, it functions similarly to a limit order by lowering the average purchase price, known as the cost basis.
For instance, if you consistently invest a set amount into an index fund biweekly for a year, your cost basis will reflect the average price of the fund during that period. Contrastingly, investing all the money at once may result in buying at a yearly peak, leading to a higher cost basis compared to dollar-cost averaging.
Key points:
- While dollar-cost averaging can lower the cost basis, it doesn't offer the direct control of a limit order. Thus, it suits long-term investors more than traders seeking specific short-term purchase prices.
- Setting up dollar-cost averaging typically involves paperwork, such as arranging recurring contributions from your bank account or coordinating with your employer for paycheck deductions. Additionally, configuring your brokerage or retirement account ensures automatic investment into chosen stocks or funds.
5. Understanding when to sell stocks — and when not to
You may decide to sell your stocks when you've achieved satisfactory profits or require cash. Ideally, align your sales with long-term investment goals to meet both objectives simultaneously.
It's advisable to avoid investing funds you'll need within the next five years due to stock market volatility. Stocks may experience declines before rebounding, potentially leading to a loss if sold prematurely. Although selling stocks at a profit is an option, be aware of potential capital gains taxes and missed future gains.
Equally important is recognizing when not to sell stocks. Selling during a market downturn to minimize losses is generally discouraged as it crystallizes existing losses. Financial advisors often advocate for enduring market fluctuations and focusing on long-term growth, as markets tend to recover over time.
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