To buy stocks, you’ll first need a brokerage account, which you can set up in about 15 minutes. Then, once you’ve added money to the account, you can follow the steps below to find, select and invest in individual companies.
It may seem confusing at first, but buying stocks is really pretty straightforward. Here are five steps to help you buy your first stock:
1. Select an online stockbroker
The easiest way to buy stocks is through an online stockbroker. After opening and funding your account, you can buy stocks through the broker’s website in a matter of minutes. Other options include using a full-service stockbroker, or buying stock directly from the company.
Opening an online brokerage account is as easy as setting up a bank account: You complete an account application, provide proof of identification and choose whether you want to fund the account by mailing a check or transferring funds electronically.
2. Research the stocks you want to buy
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 a little 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. Decide how many shares to buy
You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with a stock all at once. Consider starting small — really small — by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master the shareholder swagger.
New stock investors might also want to consider fractional shares, a relatively new offering from online brokers that allows you to buy a portion of a stock rather than the full share. What that means is you can get into pricey stocks — companies like Google and Amazon that are known for their four-figure share prices — with a much smaller investment. SoFi Active Investing, Robinhood and Charles Schwab are among the brokers that offer fractional shares.
Many brokerages offer a tool that converts dollar amounts to shares, too. This can be helpful if you have a set amount you’d like to invest — say, $500 — and want to know how many shares that amount could buy.
4. Choose your stock order type
Don’t be put off by all those numbers and nonsensical word combinations on your broker's online order page. Refer to this cheat sheet of basic stock-trading terms:
|Ask||For buyers: The price that sellers are willing to accept for the stock.|
|Bid||For sellers: The price that buyers are willing to pay for the stock.|
|Spread||The difference between the highest bid price and the lowest ask price.|
|Market order||A request to buy or sell a stock ASAP at the best available price.|
|Limit order||A request to buy or sell a stock only at a specific price or better.|
|Stop (or stop-loss) order||Once a stock reaches a certain price, the “stop price” or “stop level,” a market order is executed and the entire order is filled at the prevailing price.|
|Stop-limit order||When the stop price is reached, the trade turns into a limit order and is filled up to the point where specified price limits can be met.|
There are a lot more fancy trading moves and complex order types. Don’t bother right now — or maybe ever. Investors have built successful careers buying stocks solely with two order types: market orders and limit orders.
With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. Because a market order puts no price parameters on the trade, your order will be executed immediately and fully filled, unless you’re trying to buy a million shares and attempt a takeover coup.
Don’t be surprised if the price you pay — or receive, if you’re selling — is not the exact price you were quoted just seconds before. Bid and ask prices fluctuate constantly throughout the day. That’s why a market order is best used when buying stocks that don’t experience wide price swings — large, steady blue-chip stocks as opposed to smaller, more volatile companies.
Good to know:
- A market order is best for buy-and-hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.
- If you place a market order trade “after hours,” when the markets have closed for the day, your order will be placed at the prevailing price when the exchanges next open for trading.
- Check your broker’s trade execution disclaimer. Some low-cost brokers bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or a specific time or day of the week.
A limit order gives you more control over the price at which your trade is executed. If XYZ stock is trading at $100 a share and you think a $95 per-share price is more in line with how you value the company, your limit order tells your broker to hold tight and execute your order only when the ask price drops to that level. On the selling side, a limit order tells your broker to part with the shares once the bid rises to the level you set.
Limit orders are a good tool for investors buying and selling smaller company stocks, which tend to experience wider spreads, depending on investor activity. They're also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment.
There are additional conditions you can place on a limit order to control how long the order will remain open. An “all or none” (AON) order will be executed only when all the shares you wish to trade are available at your price limit. A “good for day” (GFD) order will expire at the end of the trading day, even if the order has not been fully filled. A “good till canceled” (GTC) order remains in play until the customer pulls the plug or the order expires; that's anywhere from 60 to 120 days or more.
Good to know:
- While a limit order guarantees the price you’ll get if the order is executed, there's no guarantee that the order will be filled fully, partially or even at all. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade.
- Limit orders can cost investors more in commissions than market orders. A limit order that can't be executed in full at one time or during a single trading day may continue to be filled over subsequent days, with transaction costs charged each day a trade is made. If the stock never reaches the level of your limit order by the time it expires, the trade will not be executed.
5. Optimize your stock portfolio
We hope your first stock purchase marks the beginning of a lifelong journey of successful investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them. But there are a few things in your control.
Once you're familiar with the stock purchasing process, take the time to dig into other areas of the investment world. How will mutual funds play a part in your investment story? In addition to a brokerage account, have you set up a retirement account, such as an IRA? Opening a a brokerage account and buying stocks is a great first step, but it's really just the beginning of your investment journey.
Spotlight On: Energy Stocks
Here are three energy stocks you'll find at discounted prices due to the current macroeconomic landscape:
1. Cheniere Energy Inc. (ticker: LNG)
Cheniere Energy operates facilities that liquefy natural gas to be loaded onto ships and transported globally. As the largest liquefied natural gas, or LNG, operator in the U.S., Cheniere Energy remains a favorite, Thummel says. “The U.S. has a real opportunity to be a global leader in liquefied natural gas,” he says. “The U.S. could be the largest LNG provider in the world by the middle of the decade.” The stock market is undervaluing the steady, fee-based nature of the company. “This model was tested during the pandemic, and the company delivered a steady, growing stream of cash flow,” Thummel says. “As the company increases free cash flow generated to pay down debt and establish a dividend, the market will begin to better appreciate the potential of Cheniere.”
2. NRG Energy Inc. (NRG)
NRG Energy, the Houston-based electricity company, reported second-quarter net income of $1.1 billion, compared to a loss of $82 million during the first quarter, which included massive losses from the blackout in Texas caused by a February storm. The company offers a dividend yield of 3%, and its cash flow is expected to continue to improve since the setback in February, says Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin. Over a longer period, the company's stock could trade closer to the consumer staples or telecom sectors than to traditional independent power producers, he says. The price target of the stock is $57, “which implies (significant) upside from the current price and is one of our largest holdings for our institutional client accounts,” Underhill says. NRG finished the trading day Aug. 9 at $43.89.
3. BP plc (BP)
BP, an energy behemoth that owns a large portfolio of renewable assets, provides a 5.2% dividend yield. The company agreed to acquire 9 gigawatts of U.S. solar development projects from developer 7X Energy in June. This acquisition would increase the company's renewables pipeline from 14 GW to 23 GW. BP also owns offshore wind interests in the U.S. and U.K. and plans to develop 50 GW of renewable generating capacity by 2030. BP generates one of the best production outlooks of international oil companies, and the stock could generate returns of 7.2% in 2021 and 10.1% in 2022 with crude oil prices at $70 per barrel, Underhill says.
Spotlight On: Non-cyclical Stocks
Non-cyclical stocks, sometimes called defensive stocks, are the cyclical stocks’ opposite. Stocks in the non-cyclical category follow steady trends of growth and aren’t impacted much by economic cycles.
These stocks have some form of economic shield in place that allows them to hold value during economic recessions, and they also provide products and services that fill a need during economic expansions.
As a result, economic cycles have little to no bearing on the price movement of these stocks.
Examples Of Non-cyclical Stocks
There are several areas of business that are represented by non-cyclical stocks. Some of the most common include:
- Defense. Unfortunately, there will always be a need for military defense. As long as geopolitical tensions live on, governments around the world will always be willing to pay top dollar for the best in defense technology, shielding defense companies from economic downturns as well as providing a point of value during expansions.
- Pharmaceuticals. Regardless of economic conditions, when you get sick, you will go to the doctor, purchase medicine, and consider other medical services. As such, strong biotechnology companies will see revenue growth even during economic downturns.
- Utilities. Electricity, natural gas, clean water, and sewage services are the basics of consumer needs in developed nations. As such, whether economic times are good or bad, revenue growth stays relatively consistent within the utilities sector.
- Non-cyclical Consumer Goods. Most consumer goods fall into the cyclical category. However, toilet paper, cleaning supplies, toothpaste, and other consumer goods are absolutely essential. Companies that supply the overwhelming demand for these types of products will see revenue growth regardless of economic conditions.