Stock Trading
Feb. 5, 202415 min read

How To Buy Stocks: A Beginner’s Guide

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Written by Tim Bohen

Investing in stocks is a fundamental step towards building wealth and financial security. But for beginners, entering the stock market can seem like navigating a labyrinth. Let’s break down this process into manageable steps.

You should read this article because it demystifies the process of buying stocks, offering practical advice and insights for beginners to navigate the stock market confidently.

I’ll answer the following questions:

  • What is a stock and why is it important for investing?
  • What are the benefits of investing in stocks?
  • How does diversification of a financial portfolio work with stocks?
  • What are the different types of stocks available for investment?
  • How can you determine your risk tolerance and set investment goals?
  • What are the steps to buying stocks, including choosing a brokerage?
  • How do you research and decide what stocks to buy?
  • What are some key strategies for beginners when choosing stocks?

Let’s get to the content!

What Is a Stock?

A stock is a unit of ownership in a company. When you buy a stock, you’re purchasing a small part of that company, known as a share. Stocks are traded on exchanges, places where buyers and sellers meet to exchange stocks at agreed-upon prices. Understanding stocks is foundational for investing, and it’s vital to have clear information on what you’re investing in. In my teaching experience, I emphasize the importance of understanding the basics, as it’s the bedrock of successful trading.

The Purpose of Investing in Stocks

A stock represents a share in the ownership of a company. When you buy stocks, you’re essentially buying a piece of a business. The primary purpose of investing in stocks is to partake in the company’s growth and earnings. Stocks allow investors to grow their money, outpacing inflation and bank interest rates. In my years of trading, I’ve seen stocks transform modest investments into significant wealth, underlining the power of investing with a strategic mindset.

Benefits of Investing in Stocks

Investing in stocks offers a variety of benefits, from potential financial gains to a sense of ownership in leading companies. Diversifying your portfolio with stocks can help mitigate risks associated with other investment products like bonds, CDs, or even life insurance policies. As a seasoned trader, I’ve learned that a well-balanced portfolio, inclusive of stocks, can help cushion against market volatility and economic fluctuations, including changes in mortgage rates or the money market.

Diversification of Financial Portfolio

Investing in stocks is a key strategy for diversifying your financial portfolio. Diversification reduces risk by spreading investments across various sectors and asset classes. My experience has taught me that a well-diversified portfolio can weather market volatility better than one focused on a single type of investment.

Potential for Significant Long-Term Gains

Stocks have historically provided substantial long-term gains. Investing in stocks offers the potential for capital appreciation, meaning the value of your investment can grow over time. This growth often outperforms other investment types and is a cornerstone of building wealth.

Passive Income Through Dividends

Some stocks pay dividends, providing a source of passive income. Dividends are portions of a company’s profit paid to shareholders. They offer a dual benefit: income in addition to potential price appreciation of the stock.

Ownership in Promising Companies

Buying stocks means owning a part of a company you believe in. This ownership can be rewarding, especially if the company grows and succeeds over time.

Liquidity and Flexibility in Investments

Stocks are highly liquid assets, meaning they can be easily converted into cash. This liquidity provides flexibility, allowing investors to respond quickly to market changes or personal financial needs.

Different Types of Stocks To Buy

There’s a wide range of stocks to consider, from blue-chip companies to emerging startups. Each type offers different risk and return profiles. It’s like choosing between different financial products — some are like steady, interest-earning savings accounts (think dividend stocks or blue-chips), while others are akin to high-reward but higher-risk ventures (like growth stocks). My advice, drawn from years of trading, is to balance your portfolio across various stock types, much like you would diversify across different financial products like IRAs, credit cards, or even loans.

Individual Stocks

Individual stocks allow you to invest in specific companies. This requires thorough research and analysis to understand the company’s business model, financial health, and growth prospects. It’s about choosing companies that align with your investment strategy.

Funds

Investing in funds, like mutual funds or ETFs, allows you to buy a basket of stocks in one transaction. Funds are managed by professionals and offer diversification, reducing the risk associated with individual stocks.

Fractional Shares

Fractional shares let you invest in high-priced stocks with a smaller amount of money. This option is ideal for beginners with limited funds but still wanting exposure to major companies.

Brokerage Options

Selecting the right brokerage is crucial. Consider factors like fees, services, research tools, and user experience. An online brokerage account is typically the best option for beginners due to its accessibility and resources.

Research & Preparation

Research and preparation are non-negotiable in stock trading. This process involves not just understanding the stocks but also understanding yourself as an investor. Are you looking for short-term gains, or are you in it for the long haul, akin to a long-term loan or a mortgage? I always advise beginners to treat research with the seriousness of financial planning — it’s about gathering all the necessary information, using reliable tools and reviews, and then forming a strategy that aligns with your financial goals and risk tolerance.

In the realm of research and preparation, building a watchlist is an indispensable step. A watchlist is a personalized list of stocks that you’re monitoring for potential trading or investment opportunities. It helps you track and analyze the performance of these stocks, keeping you informed about market movements and company news. Creating a watchlist is like setting up your own financial dashboard, where you can watch the stocks that align with your investment strategy and goals. For beginners and seasoned traders alike, a well-curated watchlist is a powerful tool in making informed decisions. To learn how to build an effective watchlist, check out StocksToTrade’s guide on building a watchlist.

Understanding Risk Tolerance

Understanding your risk tolerance is crucial. Stocks can be volatile, and you need to be comfortable with this uncertainty. Analyze how much risk you’re willing to take and invest accordingly.

Setting Investment Goals

Define your investment goals. Are you saving for retirement, a house, or your child’s education? Your goals will dictate your investment strategy, including the types of stocks you choose and your time horizon.

Determining Your Timeframe for Investing

Your investment timeframe influences your strategy. Long-term investments can ride out market volatility, while short-term investments require a different approach, focusing on current market trends.

Learning the Basics of the Stock Market

Familiarize yourself with stock market basics. Understand how the market works, what drives stock prices, and the different factors that can impact your investments.

Choosing an Online Brokerage or Financial Advisor

Choose a reliable online brokerage or financial advisor. Look for platforms offering comprehensive educational resources, robust trading tools, and responsive customer service.

Choosing the right online brokerage or financial advisor is crucial, but it isn’t the whole story. Day trading requires a platform that offers fast execution, real-time data, and advanced charting tools. The best trading platform for day traders should cater to the unique needs of high-frequency trading, providing robust technology and comprehensive market analysis tools. 

It’s not just about having a platform; it’s about having the right platform that aligns with your day trading strategies and goals. For those looking to dive into day trading, it’s essential to select a platform that can keep up with the fast-paced nature of the market. Discover StocksToTrade’s recommendations for the best trading platform for day traders.

When it comes to trading platforms, StocksToTrade is first on my list. It’s a powerful trading platform that integrates with most major brokers.

I use StocksToTrade to scan for news, tweets, earning reports, and more — all covered in its powerful news scanner. It has the trading indicators, dynamic charts, and stock screening capabilities that traders like me look for in a platform. It also has a selection of add-on alerts services, so you can stay ahead of the curve.

Grab your 14-day StocksToTrade trial today — it’s only $7!

Deciding What and How To Buy Stocks

Deciding what and how to buy stocks is a crucial step. It’s about aligning your investment choices with your financial objectives, much like how a Certified Financial Planner (CFP) would tailor advice to suit individual needs. In my experience, the key is to analyze market trends, company performance, and other financial data, almost like comparing different financial products such as credit cards or insurance plans, to determine the best fit for your portfolio.

Researching Companies and Their Fundamentals

Conduct thorough research on companies you’re interested in. Analyze their financial statements, market position, and future growth potential. This research forms the backbone of your investment decision.

Examining Current Market Prices and Trends

Study current market prices and trends. Understanding the market environment helps in making informed decisions, whether it’s the right time to buy or if a stock is valued appropriately.

Incorporating technical analysis is a game-changer. Technical analysis involves studying historical market data, primarily price and volume, to forecast future stock price movements. It’s a skill that allows traders to identify trends, patterns, and potential trading opportunities. 

Mastering technical analysis can significantly enhance your ability to select stocks with better precision and confidence. It’s not just about understanding a company’s financials; it’s about understanding market psychology and dynamics. For traders looking to deepen their knowledge in this area, StocksToTrade’s comprehensive guide on technical analysis is an invaluable resource.

How Do You Buy Stocks?

Buying stocks typically involves opening a brokerage account, which is a straightforward process similar to opening a bank account or applying for a credit card. It’s important to choose a broker that aligns with your investment style and goals. From my trading experience, I recommend considering factors like commission costs, available research tools, and the level of guidance and advice offered. Whether it’s choosing the right IRA for retirement or selecting the right stocks for your portfolio, informed decision-making is crucial.

Open an Account with an Online Broker or Financial Advisor

To buy stocks, open an account with an online broker or financial advisor. This step is your gateway to the stock market, offering tools and services to facilitate your investments.

Calculate Trading Commissions

Understand and calculate trading commissions. These fees can impact your investment returns, especially if you make frequent trades.

Research the Stocks You Want to Buy

Conduct in-depth research on the stocks you want to buy. This research should align with your investment strategy and goals.

Decide How Many Shares to Buy

Determine the number of shares to buy based on your budget and investment strategy. Remember, it’s not about the quantity but the quality of your investment.

Buy Stocks Using the Right Order Type for You

Choose the right order type when buying stocks. Whether it’s a market order, limit order, or stop order, each has its advantages depending on your investment strategy.

Optimize Your Stock Portfolio

Regularly review and optimize your stock portfolio. This involves rebalancing to maintain your desired asset allocation and adjusting your investments based on performance and market changes.

Know When to Sell Stocks

Knowing when to sell is as important as knowing when to buy. Develop criteria for selling, whether for taking profits, cutting losses, or portfolio rebalancing.

Best Stocks for Beginners

Choosing the best stocks for beginners involves focusing on companies with stable earnings, strong fundamentals, and lower volatility. Look for well-established companies with a track record of growth and resilience in various market conditions.

Key Takeaways

Investing in stocks is a journey. It requires research, patience, and a disciplined approach. As a seasoned trader, I’ve learned that success in the stock market comes from informed decisions, a well-planned strategy, and an understanding of one’s own investment goals and risk tolerance.

There are a ton of ways to build day trading careers… But all of them start with the basics.

Before you even think about becoming profitable, you’ll need to build a solid foundation. That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up.

You can check out the NO-COST webinar here for a closer look at how profitable traders go about preparing for the trading day!

What stocks are you watching? If you made it this far, write “I won’t trade without a plan” in the comments!

Frequently Asked Questions

How Can I Buy Stocks Online Without a Broker?

You can buy stocks directly from some companies through direct stock purchase plans (DSPPs). However, using an online broker offers more flexibility and options.

How Many Shares of Stock Should I Buy?

The number of shares you should buy depends on your investment strategy and budget. Don’t overextend; invest what you can afford to lose.

How Can I Buy Dividend Stocks?

Research companies that have a history of paying dividends. Online brokerages and financial advisors can provide tools and advice to help you find suitable dividend stocks.

How Do Brokers Influence Investment Strategies and Financial Outcomes?

Brokers are key players in the financial market, serving as intermediaries between buyers and sellers in stock trading. They not only facilitate transactions but also provide crucial investment advice. Understanding their role is essential in shaping investment strategies and achieving desired financial outcomes. Brokers often employ various tools, such as investment calculators, to aid investors in making informed decisions. The strategies and advice offered by brokers are tailored to serve different investment purposes, whether it’s long-term growth, income generation, or capital preservation.

Why Is a Holistic Understanding of People and Market Dynamics Crucial in Finance?

In finance, especially in stock trading, recognizing the influence of people and their collective behaviors is critical. Market dynamics are significantly impacted by the actions and reactions of various investors, who bring a myriad of perspectives and strategies. This understanding affects everything in the market, from individual stock performance to overarching trends. Comprehensive insights into these human elements are invaluable for making informed investment decisions, navigating market volatility, and identifying potential opportunities.