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How to Buy Stocks

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The three main ways how to buy stocks/shares online are:

  1. through an investment account at an online broker,
  2. through a full-service broker, or
  3. to buy the stock directly.

Have you ever wondered what the specific phases are for buying a stock? Many people own stocks which makes them part owners in different companies. But how did they do it? This article will walk you through the five main phases of buying a stock.

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Phase 1: Opening an account

Do you know where you can buy stocks? Many people have the mental image of the frenetic New York Stock Exchange trading floor with giant TVs and screens all around them. While this still does happen, it includes only a small fraction of the total number of trades that occur each day. For most investors, the easiest way to buy stock in the company is through an online stockbroker.

Opening an account with an online stockbroker is very similar to opening a new bank account. For an online brokerage account, the process starts with an application where you provide evidence of your identity and choose the bank accounts you will use to fund the brokerage account.

What are the most important considerations when choosing an online broker?

While there are a lot of things to consider when choosing an online broker, the two most important things are the cost of commissions and the amount of support you need from the brokerage.

  • Commissions

A commission is a fee charged by a broker anytime you buy or sell a stock. It is essential that you choose a broker who charges the lowest commissions possible because you have to pay the fees even if you don’t make a profit. (If you’re considering active day trading, check out our article here.) The more frequently you trade, the more you pay in commissions.

The two low-cost brokers that we recommend are:

  1. IQ Option – read our IQ Option review
  2. Plus500 – read our Plus500 review

IQ Option charges a flat $4.95 for every trade. For example, if you purchase one share of Apple stock, you will pay $4.95 for that trade. If you sell that same share of Apple stock one year later, you will pay another $4.95 to complete that trade. (Note: Active traders are charged $3.95 per trade but are required to make a minimum of 10 trades per month.

Plus500 uses a different model for their commissions. They charge one cent per share but have a minimum commission of $3 per trade.

  • The amount of support

Especially for beginning investors, it’s essential to consider the entire offer that each broker has. The main part of this is the low commissions, but things like research tools, investment guidance, educational tools, and customer support are all things that “sweeten the deal.” Most brokerages also provide video tutorials on how to use their proprietary tools and services.

The two brokerages that stand out when considering their customer service and other resources in their offering are eToro and Olymp Trade.

eToro is an older stockbroker and offers a broad selection of research on bonds, stocks, Forex, and other investments. There’s also a healthy archive of educational courses, webinars, and short training videos. Check out our full review of eToro.

Olymp Trade regularly offers in-person seminars staffed by certified financial consultants at it’s more than 30 local branches. For the online investor, Olymp Trade also offers a wide array of online webinars and courses. Check out our review of Olymp Trade here.

If you’d like to see the full list of Business24’s best stock trading brokers, check out our article or use our website’s search function to find the best broker for you based on your investing style. You can also read more about how to invest in stock market in this article

Phase 2: Choose what stocks you want to buy

After you have a fully functioning brokerage account, the next step is to choose which stocks you are going to put into your portfolio. It’s generally recommended to focus on companies you are already familiar with and trust.

One common pitfall of new investors is getting distracted by all of the information available for investors. The financial markets are a highly complex system with millions of interconnecting variables, and it’s almost impossible to master them all. Instead, remember that you have just one focus, which is to become a part-owner of a company that you can trust for the long-term.

One often-repeated quote from Warren Buffett says:

Buy into a company because you want to own it, not because you want the stock to go up.”

For value investors like Warren Buffett and others saving for retirement, this is an excellent mantra to live by.

Probably the best place to start when researching a company is with its annual report. The annual report contains a lot of information. One specific part of the annual report is a letter to shareholders from the management and administration of that company. This letter provides a background and history of what has happened in the previous year. This letter helps to understand the information in the report.

After you’ve looked at that letter and the rest of the companies annual report, most of the rest of the information can be found on your broker’s website. From here on out, the most important things to be aware of are the quarterly earnings updates, conference call transcripts, and SEC filings.

If you’d like to learn more about how to evaluate a company for your investment portfolio, check out “How to research companies.”

Phase 3: Deciding the number of shares to buy

When you are beginning investor, it is best to purchase a small and carefully chosen number of shares in just a few companies. Sometimes beginning investors might feel pressured to buy lots of shares in many different companies. Let’s be frank – you should never feel pressured to purchase stock. It might even be a good idea to start things off with a purchase of one share of one stock.

As you watch the price of that single share over time, you will know whether or not you have the emotional stability to resist the urge of selling when the stock price goes down. If you can hold on to your share even when you lose a little bit of money, two things will happen. First, you won’t lose very much money because you’ve only invested in one share. Second, you’ll realize that the share price is lower, which means you can buy more for less money. If you’ve purchased stock in a healthy company, then the price will probably go back up soon. That means you can buy other shares at a lower price and get a return faster. But these kinds of opportunities only happen if you can hold on during the downtimes.

Phase 4: Decide the stock order type

The world of investing can use familiar words in strange ways. Your broker’s order forms will have common words like “limit order” and “spread,” but what they mean might not be easy to figure out. Check out our cheatsheet below to learn the meanings of these words.

Ask: The price that sellers will pay for a stock.

Bid: The price that buyers will pay for a stock.

Spread: The difference between the lowest bid price and the highest bid price.

Market order: A “Buy it now” or “Sell it now” order

Limit order: A “buy it at this price” or a “sell it at this price.”

Stop (or stop-loss) order: An order for a specific price point at which an entire trade is stopped and sold as a market order

Stop-limit order: An order for a specific price point at which an entire trade is stopped and sold as a limit order

This is just a small fraction of the complex order types and fancy trading moves that you can find inside the world of investing. For a beginning investor, these things are not necessary. And frankly, they might never be necessary. Many investors use only limit orders and market orders and are very successful.

Market orders

Market orders are the most straightforward order type. They indicate that you are going to buy or sell a specific stock at the best price available in the market. There are no price or time restrictions. If the market is open, your trade will happen immediately.

Be aware that prices fluctuate a lot during a regular trading day. Larger companies such as Apple will have small price variation, but small companies can have significant price changes over short periods. For beginning investors who are focused on a “buy-and-hold” strategy for long-term investing, the market order is the most frequent type of order. It is best for purchasing shares in stable “blue-chip” companies that have a relatively steady price range from day to day.

It’s important to remember that market orders that are executed “after hours” may not receive the price quoted. Instead, they will receive the best price available the next time the market opens.

Be sure to know how your broker executes trades and whether or not it fits your needs. Some of the lower-cost brokers never allow for immediate market orders and instead put all customers in a limit order “queue.” That entire queue is then processed simultaneously at a specific time of the day.

Limit orders

An example might be the best way to explain how a limit order works. Let’s imagine that Apple stock is trading at $300 per share; however, you think that $300 is overpriced and should be at $275. You can set up a limit order that tells your broker only to purchase Apple stock when the price drops to $275.

Limit orders can also be used on the selling side. Using the same example, if you purchased Apple stock at $300 per share and wanted to sell it at $325 per share, then you could set up a limit order so that it could happen automatically.

Limit orders are best for companies whose stock price tends to fluctuate a lot. The difference between the high price and the low price of a single stock is called the “spread.” They can also be highly useful in helping to “automate” orders during periods of market volatility. That is because it can be challenging to execute many different prices simultaneously.

Limit orders can also have additional parameters or conditions. One of those conditions is a control of how long in order can stay open. That means our buy price of $275 could be limited to only be valid for the next month.

“All or none” (AON) is another type of order related to your specific portfolio and the price you paid for your shares. Once all of the shares you wish to trade reach a particular price point, the trade will be executed.

“Good Till Cancelled” (GTC) is a third type of order that stays open until it is canceled or it expires. GTC orders can remain open for more than 120 days

Don’t forget!

Even though limit orders offer a guarantee on price, they do not guarantee that the order will take place. That can happen because a limit order will always be executed after a market order. Beyond that, the parameters for limitations that you have put on the limit order may never occur. That means that the limit order will also never happen.

Large limit orders can also be more expensive that large market orders. This is because limit orders are executed after market orders, which sometimes means the limit order will not be entirely completed in a single day. In other words, some of the shares might be sold on Monday, and you would be charged a commission for that. If some shares are left over to the next day, selling those shares will cost another commission.

Phase 5: Perfecting your portfolio

We always want all of our trades to be successful. However, the reality is that nobody controls the market and even high-level investors like Warren Buffett and Ray Dalio lose money sometimes. You should follow their example by only focusing on the things that you can control.

But what are the things that you can control?

Your resources. This includes things like the articles at Business24-7, the educational materials that your broker offers, and your understanding of the market conditions.

Brokerage fees. While you can’t directly control the fees that your brokerage charges, you can control which brokerage you use – that, in turn, will affect the fees you pay. You can also control how frequently you make trades which will also affect the number of commissions that you have to pay.

Risk. While you can’t eliminate risk, one excellent way of minimizing risk is through the use of low-cost Exchange Traded Funds (ETFs) and index funds. Check out the list we built of the best brokers for exchange-traded funds.

At Business24-7, we focus on maintaining high editorial standards and assisting you in making profitable financial decisions. As part of this, we feature many products from our partners in our articles. This does not affect our evaluation of their services.

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