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Buying Stocks For The First Time
To buy stocks, you first need a brokerage account, which you can create in about 15 minutes. Then, once you add money to your account, you can find, choose and invest in individual companies.
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It may seem confusing at first, but buying stocks is quite simple. Here are five steps to help you learn how to buy stocks:
The easiest way to buy stocks is through an online stock broker. After opening and funding your account, you can buy stocks in minutes through the broker’s website. Other options include using a full-service stock broker or buying shares directly from the company.
Opening an online brokerage account is as easy as opening a bank account: you fill out an account application, provide proof of identity, and choose whether you want to fund the account by sending a check or electronic funds transfer.
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Once you’ve created and funded your brokerage account, it’s time to get into the business of picking stocks. A good place to start is by researching companies you already know from your experience as a customer.
Don’t let the flow of data and real-time market movements overwhelm you when doing your research. Keep the goal simple: find companies you want to be a part of.
Warren Buffett famously said, “Buy a company because you want to own it, not because the stock will go up.” By following this rule, he has done quite well for himself.
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Once you’ve identified these companies, it’s time to do your research. Start with the company’s annual report – especially management’s annual letter to shareholders. The letter will give you a general background on what’s going on in the business and provide context for the numbers in the report.
After that, most of the information and analytical tools needed 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 instructions on how to use their tools and even basic stock picking seminars.
For more information on evaluating companies for your portfolio, see our stock research guide.
You shouldn’t feel any pressure to buy a certain number of stocks or fill your entire portfolio with stocks at once. Consider getting started in paper trading using a stock market simulator to get your feet wet. With paper trading, you can learn how to buy and sell stocks using play money. Or if you want to invest real money, you can start small – very small. You might consider buying just one stock to get a feel for what it’s like to own individual stocks and if you’re willing to ride out the rough patches with minimal sleep loss. You can increase your position over time as you overcome shareholder betrayal.
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New stock investors may also want to consider fractional shares, a relatively new offering from online brokers that allows you to buy a portion of a stock instead of the entire bet. This means that you can get expensive stocks with a much smaller investment. SoFi Active Investing, Robinhood and Charles Schwab are among the brokers that offer fractional shares.
Many brokerages also offer a tool that converts dollar amounts into shares. This can be useful if you have a certain amount of money you want to invest—say, $500—and you want to know how many stocks that amount can buy.
Don’t put all those numbers and meaningless combinations of words on your broker’s online order page. Check out this list of basic stock trading terms:
When the stock reaches a certain price, the “stop price” or “stop level”, the market order is executed and the entire order is filled at the prevailing price.
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When the stop price is reached, the trade is converted to a limit order and filled to the point where the specified price limits can be met.
The act of placing market orders in sequence and at regular intervals (eg, buying shares at the market price every two weeks on settlement day) to purchase at an average price over a long period of time.
There are many more fancy trading moves and complex order types. Don’t worry now – or maybe ever. Investors have made successful careers buying stocks exclusively with two types of orders: market orders and limit orders.
With a market order, you indicate that you will buy or sell shares at the best available current market price. Because a market order does not set price parameters on a trade, your order will be filled immediately and in full, unless you try to buy a million shares and try to flip. A market order will also fail if you tried to buy shares with very small trading volume.
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Don’t be surprised if the price you pay – or receive if you sell – is not the exact price you were quoted a few seconds ago. Bid and offer prices fluctuate constantly throughout the day. That’s why the market order is best used when buying stocks that don’t experience large price swings—large, stable blue-chip stocks, as opposed to smaller, more volatile companies.
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A limit order gives you more control over the price at which your trade is executed. If KSIZ stock is trading at $100 per share and you think $95 per share is more in line with how you value the company, your limit order tells your broker to execute your order only when the ask price falls to that level. On the sell side, a limit order tells your broker to exit a stock when the bid rises to a level you set.
Limit orders are a good tool for investors who buy and sell stocks of smaller companies that experience larger spreads depending on the investor’s activity. They are also good for investing during periods of short-term stock market volatility or when stock price is more important than order execution.
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There are additional conditions you can place on a limit account to control how long the account stays open. An all or nothing (AON) order will only be executed when all the shares you want to trade are available at your price limit. A “good for day” (GFD) order expires at the end of the trading day, even if the order is not fully filled. A “good until canceled” (GTC) order remains in play until the customer unplugs or the order expires; It is from 60 to 120 days or more.
Dollar cost averaging means you regularly buy stocks at the market price—for example, by investing a certain amount of your paycheck in an index fund every two weeks.
It’s not technically an order type, but like a limit order, it’s a way to reduce the average purchase price of your investments, also known as the cost basis.
If you dollar cost average by investing a certain amount in an index fund every two weeks for a year, your cost basis will be the average price of that index fund over that year.
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On the other hand, if you are going to invest all that money, on the other hand, there is a chance that you will buy when the price of the fund reaches its annual peak. This will give you worse, in other words, higher value than average dollar value.
We hope that buying your first stock marks the beginning of a lifelong journey of successful investing. But if the going gets tough, remember that all investors—even Warren Buffett—go through rough patches. The key to long-term success is to keep your perspective and focus on what you can control. Market rotation is not among them. But there are a few things within your control.
Once you’ve mastered the process of buying stocks, take your time to explore other areas of the investing world. How mutual funds will play
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