If you have ever asked yourself “Should I buy stocks?”, “I want to buy stocks” and then “How do I buy stocks?”, this post is for you.
Buying stocks or making investments is a way to save money while busy working, or with the usual routine of our lives, and make that money work for you, so that you can fully reap the rewards of your work in the future. Investing is a means to a happier end. The goal of investing or buying stocks is to put your money to work with the hope of making it grow over time.
Imagine you have $1,000 set aside and are ready to enter the investment world. Or maybe you only have an extra $10 a week and want to make a profit. In this article we are going to guide you to get started as an investor and show you how to maximize your returns while minimizing your costs.
What does it mean to buy stocks?
The word stock refers to ownership interest in a particular company. So, what does it mean to own stock? Owning stock means that you own a very small fraction of the company.
Why should you buy stock?
We can give you 3 reasons why to invest in stocks:
- Stocks pay dividends: a dividend is a portion of the company’s profits that it pays to shareholders every 3 months.
- You own a share of what the company would earn if it decided to sell: if the owners decide to sell the company, you get a share of the profit.
- Larger shareholders can obtain some voting rights when it comes to making decisions about the company.
How to buy shares on the stock exchange
First of all, to buy shares, you must either have a bank account in possession or open an account with an online broker. The second option is usually cheaper because all the procedures are done online and reduce the costs of traditional banking.
These types of online accounts can allow you to start investing with little money and are ideal for testing and training your stock trading skills.
STEP 1 to buy stocks: Open a brokerage account
Stocks are bought and sold on stock exchanges, but you can’t buy them outright. To gain access to the market, you must open a taxable brokerage account.
Brokerage accounts function similarly to bank accounts, except that they are used to buy and sell securities.
You choose a provider and open the account online, move money into the account and you are ready to buy stocks with a few clicks.
There are many licensed brokers to choose from, and the decision revolves around your individual needs and priorities. When it comes to choosing a broker there are three main options, full service brokers, discount brokers and roboadvisor, but we must ask ourselves the question What type of investor am I?
What type of investor am I?
Before you commit your money you should know what type of investor you are. When opening a brokerage account, an online broker will ask you about your investment objectives and how much risk you are willing to take on.
Some investors want to be actively involved in managing the growth of their money, and others prefer to “set it and forget it.” The more “traditional” online brokers, such as the two mentioned above, allow you to invest in stocks, bonds, ETFs, index funds and mutual funds.
Brokers are either full-service or discount brokers.
Full-service brokers provide the full range of traditional brokerage services, including financial advice for retirement, health care and all things money-related. They typically only deal with higher net worth clients and may charge high fees, including a percentage of their transactions, a percentage of their assets under management, and sometimes an annual membership fee. It is common to see account sizes of minimum €25,000 and above at full-service brokerages. Still, traditional brokers justify their high fees by giving detailed advice to your needs.
Discount brokers used to be the exception, but now they are the norm. Online discount brokers give you tools to select and make your own trades, and many also offer an automated set-it-and-forget-it advisory service. As the financial services space has progressed, online brokers have added more features, including educational materials on their sites and mobile apps.
In addition, although there are a number of discount brokers with no minimum deposit restrictions, you may face other restrictions and certain fees may be charged to accounts that do not have a minimum deposit. This is, something an investor should be aware of if they want to invest in stocks.
After the 2008 financial crisis, a new generation of investment advisors was born: the roboadvisor. Their mission is to use technology to reduce costs for investors and optimize investment advice.
If you want an algorithm to make investment decisions for you, including tax loss harvesting and rebalancing, a roboadvisor may be for you. And as the success of indexed investing has shown, if your goal is long-term wealth creation, you may be better off with a roboadvisor.
STEP 2 to buy stocks: Research and pick stocks.
The stock market has thousands of publicly traded companies, each with different offerings. If you feel overwhelmed, remember that when you buy shares of a company, you are buying partial ownership of the entity. So, a logical place to start is to ask yourself which companies and industries interest you.
Once you narrow down your choices, perhaps you’ve identified a few companies in an industry you’re passionate about, it’s time to think like an analyst and do some research. The best place to start is the company’s annual report, taking into account financials and letters to shareholders.
There are countless strategies when it comes to picking or buying stocks. For example, if you believe the stock should pay you a steady stream of income, you may want to explore dividend stocks. If you have a high tolerance for risk and are curious about early-stage growth companies, consider growth stocks.
On the other hand, filling your portfolio with value stocks means finding companies that are undervalued, with the idea that they will grow and outperform the overall stock market over time.
Generally, you should have access to all the necessary research material to reach your own conclusions, but it takes time and effort to hone your analytical skills. Here are a few more tips to keep in mind when building your portfolio:
Think long-term: Unless you are looking to trade frequently and make quick profits, investing for the long term is considered the safest way to go. This is because long-term investments almost always outperform the market for a limited period of time, and impulsive or emotional trading can significantly inhibit investor returns.
Diversify your holdings: Even if you start small, consider a diversified portfolio, which simply means owning a variety of investments within and across asset classes to mitigate risk and protect against volatility.
This is why many financial advisors recommend that beginners enter the stock market by buying mutual funds or ETFs, which allow you to buy a “basket” of stocks at low cost. Index funds, in particular, can be the foundation of a well-diversified portfolio.
STEP 3 to buy stocks: Decide how much you want to spend.
You don’t need a minimum amount of money to start investing in stocks. You can always start small and add to your portfolio over time.
Because investing can have unpredictable returns, it is important to invest only what you can afford to lose and generally be aware of your appetite for risk.
The amount of money you should ultimately invest comes down to the price and number of shares you want to buy. But also keep in mind how much may be necessary to properly diversify your portfolio. To find the price of a stock on a brokerage platform, simply search for the company name or ticker symbol.
If the stock prices you are interested in are financially out of your reach, you can also explore fractional shares. Fractional shares allow you to buy fractions or part of a share. If, for example, a single share costs £500, you can buy £50 worth of shares, giving you a fraction worth 10% of a share. Today, many online brokers offer fractional shares.
Trading from scratch
Knowing the characteristics of the financial markets, and their components, is the most valuable asset we can have to buy stocks. In this way, we will know better where to place our investments and avoid scams and deceptions within the system.
Access here if you want to know our blockchain and cryptocurrencies course, which will help you to know in depth the cryptocurrency market.
From Trading desde Cero we support the training of traders so that they can move with ease and solvency in the market. If you are thinking about investing, we can help you with our basic course. This course will allow you to gain knowledge about the main elements of the financial market, as well as invest live with teachers during Trading Day sessions.
If, on the other hand, you need advanced training, we can help you with our expert course and our individual consultations. Do not hesitate to contact us.
If you have any questions about how to buy stocks, you can contact us and we will guide you. Have a nice day!