Expanded Lesson
7 min read
Buying Stocks for the First Time: Know the Basics
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You’ve heard about people buying stocks. You’ve even heard about people making a fortune by picking stocks. That sounds great! How do you get in on that? Not so fast. Buying stocks, even for the first time, is straightforward. Making a fortune on them can be harder, but it’s possible to get a nice rate of return without taking on unnecessary risk.
Lesson Notes:
- Investing in stocks is a way to grow your money and can help you reach your financial goals. However, investing in stocks and other investments comes with a certain amount of risk. Don’t invest more than you can afford to lose and consider if other financial decisions can have a greater impact.
- Determine which kind of broker is best suited for your needs, investment style and experience level.
- Stocks can be grouped into different categories based on their financial stability and growth potential. Choose a mix of stocks that can help you meet your financial goals and suits your risk tolerance.
LESSON CONTENTS
Before You Buy Stocks
First of all, while it’s possible to grow wealth over time by investing in stocks, it’s also possible to lose money. Ask yourself some questions before you start.
- Can I afford to lose this money? A good rule of thumb is, don’t invest more than you can afford to lose. If you have a lot of credit card debt, a better return on your investment could be to pay down that high-interest debt. It’s may not be as exciting as investing in the stock market, but the rate of return is essentially guaranteed (eliminating debt saves money you’d otherwise have to pay in interest) and it’s extremely low risk.
- Do you have an emergency fund? Things happen that are beyond our control, as the pandemic of 2020 pointed out nicely. If you lose your job or incur unexpected medical expenses, you’ll need ready access to cash.
- What’s your risk tolerance? Some people invest in the stock market and remember to check their balances every month or so. Some people get anxious every time stocks take a dip. To make money in the stock market, you’ll need to think long-term. If you think you might panic if your stocks lose money, consider bonds or certificates instead.
How to Buy Stock
Buying stock is easy. First, you’ll need to find a broker and open an account. In general, there are three types of brokers:
- Full-service brokers or Financial Advisors.
- Online/discount brokers.
- Brokers with robo-advisors.
Full-service brokerages can research and recommend stocks for you. They may charge commissions and other fees depending on the type of transaction. Full-service brokers and financial advisors will usually recommend stocks and other investments that are tailored to your financial goals. They can also advise on other pieces of your financial situation and help you create a plan and action steps to reach your goals.
Online/discount brokers usually don’t charge commissions for stock sales or purchases and usually have lower fees. If you need some guidance, they often have research tools available for you to take advantage of, but they usually don’t recommend stocks or give advice (they may offer advice as a separate service for an added cost). With online/discount brokers, you can usually get started with a small amount of money, whereas full-services brokers or financial advisors may have a higher investment minimum.
If you’d like a tiny bit more guidance but can’t afford a full-service broker, a robo-advisor may be an option to consider. A robo-advisor uses algorithms to trade stocks and other investments—you simply tell it what your goals are and how much you have to invest, and it will buy stocks that meet those needs. Robo-advisors may charge a management fee, but they are usually lower than full-service brokers and financial advisors.
Take some time to investigate the different broker options. Some have valuable educational resources, and some are more intuitive than others. Pick one you’re comfortable with.
Once you’ve settled on a broker, the process of opening a brokerage account is similar to opening a bank account. You’ll need:
- Your Social Security number.
- Driver’s license or other ID.
- How you plan to fund the account (current bank account information).
They might also ask you about your short and long-term goals, what your risk tolerance is, your current tax status and your level of investment experience.
What Should I Buy?
There are several different kinds of stocks. Each has different benefits and risks, so you'll want to select a mix that is most appropriate for your situation.
Blue-Chip Stocks
These are stocks from longtime market leaders, companies that are stable and financially secure. They can be expensive, but they are usually less volatile than newer companies. Examples include:
- Walmart.
- General Electric.
- Coca-Cola.
- 3M.
- Proctor & Gamble.
Value Stocks
Value investing is when you choose a stock based on the company’s financials and determine that the stock is trading for less than what the company is worth. This is the strategy in which the company or stock is bought at a relative discount in hopes that it will provide a high value or return relative to its stock price. Your broker may have filters and lists to help you identify value stocks.
Dividend Stocks
Dividend stocks pay you a small cash dividend if the stock is doing well, usually on a quarterly basis. Sometimes companies pay a one-time dividend. A company’s ability to pay out a dividend or increase its dividend can be an indicator of financial health. Dividend stocks may be more appropriate for those investors who are seeking income.
Growth Stocks
Growth stocks are stocks that have the potential to rapidly grow, like technology companies or companies that are newer and have smaller market capitalization. These companies are predicted to gain ground in a competitive marketplace. Since these companies are rapidly expanding, they may be using more debt, be operating at a net loss or have less-solid financials. This can lead to higher risk and volatility when investing in these types of stocks.
Placing an Order
Once you’ve created an account with a broker and have found some stocks you want to invest in, you’re ready to place an order. Before placing an order, there are a few things you should consider.
Some brokerages allow you to buy fractional shares, which is especially handy if an individual stock price is high. For example, if you’re interested in investing in a company like Microsoft (Nasdaq: MSFT), which trades at hundreds of dollars per share, and you only have $100 to invest, you can still invest in Microsoft through fractional shares. Check to see if your broker offers fractional shares.
You’ll also have to decide if you want to place a market order or a limit order. A market order means to buy the stock immediately at whatever price it’s currently trading for. A limit order is when you tell your brokerage to buy the stock when it reaches a certain price.
If you can’t decide on a stock, consider looking at other investments. There are investment options like mutual funds and ETFs that give you exposure to multiple stocks and investments to diversify your holdings and lower risk. Before investing, always educate yourself on the different options and ask for professional help if you’re not sure.
PLEASE NOTE: The information provided is for educational purposes only and should not be considered recommendations or advice. Please consult the appropriate financial, tax or legal professional to determine whether the strategies presented in this article are appropriate for your situation.
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