How to invest in stocks (2024)

Owning stocks is a great way to potentially increase your wealth over time.

According to research from asset manager Vanguard, a portfolio of 100% stocks returned on average 10.2% annually between 1926 and 2022, while a 100% bond portfolio averaged an annual return of 5.1% over that same period.

Knowing how to buy and sell stocks can increase your assets over the long run, said Steven Conners, founder and president of Conners Wealth Management. “In general, if you own stocks over time, you’re going to beat money markets, CDs (certificates of deposit) and what a bond earns,” he said.

Robust online brokerage offerings make it easier than ever to learn not just how to buy stocks but where to buy stocks, as well.

Here’s a step-by-step lesson on how beginners can buy stocks.

Step 1: Open a brokerage account

Opening a brokerage account is the first step to buying stocks since you can’t buy stocks directly from stock exchanges. There are two main types of online brokerage accounts: full-service brokerages and do-it-yourself discount brokerages. Most brokerage firms also have investment apps for your desktop or mobile devices, which make it simple to buy stocks and monitor your positions while you’re on the go.

Some of the most popular brokerage firms for individual investors are:

Kelly Gilbert, fiduciary investment advisor at EFG Financial, said each has its strengths, depending on your investing goals.

Full-service brokerages

A full-service brokerage offers a range of financial services beyond buying stocks for clients, including advice on retirement planning or tax preparation. They get paid by charging clients a commission to buy and sell stocks, and they may get better pricing as institutional buyers, who are sophisticated buyers with very large assets, such as pension funds, insurers, mutual funds or similar entities.

Discount brokerages

Discount brokerages make trading stocks for beginners inexpensive and easy. Most offer commission-free trading, and opening an account is a snap. Discount brokerages offer little in the way of personal advice or add-on services. Conners and Gilbert advised looking for brokerages that have been in the financial markets for many years and comparing fees as you look to buy stocks online.

To open an account at either type of broker, you will have to fill out an application and show proof of your identity. You can then link your bank account to your brokerage account to deposit funds electronically from a checking or savings account, but sending a paper check is still an option.

Step 2: Decide what stocks to buy

Owning stock means you own a slice of a company. And because there are thousands of stocks available to purchase, it’s important to research those you want to buy before investing money.

Buy what you know

Conners said famed money manager Peter Lynch, who successfully ran Fidelity Investment’s Magellan Fund and wrote the book “One Up on Wall Street,” advocated that do-it-yourself investors start with companies they know and like.

“While you own a stock, you’re going to feel more comfortable owning it, because you know who the company is, you already use their product or services,” he said.

Fundamental analysis

Begin researching by reviewing a company’s balance sheet, earnings, profit margins, growth and competition. Check to see if it pays a dividend, which is a share of the company’s profits. Many discount brokers offer free research to their clients, so start there. This type of research is known as fundamental analysis.

Technical analysis

A second type of research is technical analysis, which is the study of price movements. It uses patterns in market data to identify trends and potential opportunities. Gilbert said he uses them both. He uses technical analysis to see price trends, and he uses fundamental analysis to dig deeper into a company’s financial health.

“One is an indicator; one is an evaluator,” he said.

Step 3: Decide how many shares to buy

As you research stocks, you should also have a strategy — a reason to buy and a reason to sell. This can help influence how many shares to buy at first.

“Companies are businesses, and to the extent that a company is doing well, that’s going to be reflected in the share price over time,” Conners said.

There are different ways to decide how many shares to buy.

Buy with a lump sum

You can buy shares in a lump sum, say, investing $3,000 in a company all at once. Brokerages have calculators to help you determine how many shares a certain dollar amount will buy. Some brokerages also offer fractional shares of costly stocks, which allow people who can’t buy a full share to own a partial share.

The stair-step approach

You can also split up purchases over time. You may decide to buy $1,000 worth of stock at first and then see how the stock trades for a month or two before buying another $1,000 worth. And in another few months, you may decide to invest the last third. This stair-step approach works for stocks that are volatile or that you are buying at a deep discount to historical value but don’t want to risk a lot of money at once.

Dollar-cost averaging

The third way is dollar-cost averaging, where you first buy a stock to establish a holding and then continue to buy more on a consistent basis, whether it’s a certain number of shares or dollar amount. This is a good strategy for a long-term investor since you’re buying on a regular schedule regardless of the current price. Gilbert said investors using dollar-cost averaging should have a five-year time frame to take advantage of the strategy.

Step 4: Choose your order type

There are a few order types available to place your purchase.

Market orders

A market order sends buying instructions to the brokerage to purchase a stock at the best available price. This type of order may be fine for stocks that have a lot of trading activity and thus little difference in the price between where someone is selling the stock and where there is a willing buyer, known as the bid-ask spread. For thinly traded stocks, there may be a wide discrepancy between that spread, and you may not get the price you last saw quoted on your screen.

Limit orders

A limit order lets you choose the price at which you buy a stock. If a stock is trading for $50 and you think it’s worth $40, you can put in a limit order that tells the broker to only buy the stock if it hits $40 or less. Limit orders help avoid surprises when buying a stock, especially a thinly traded one.

Order parameters

In addition, you can put more parameters around limit orders. “Good for day” is a request to let the trade expire if the price target isn’t reached during the trading day. “Good till canceled” is a resting buy order that will be filled when a stock’s price reaches the limit price, or until you cancel the trade.

Step 5: Place your order with the brokerage

Go to the brokerage platform’s trade section, and enter the company name or stock ticker symbol, the number of shares you want to buy and the type of order.

You should have a chance to review the order before placing it. A confirmation page will show the order was received. If it’s a market order, you should get near-immediate confirmation of trade execution, and the stock should appear in your portfolio. Limit-order trade confirmations occur only if the trade is successfully executed.

Step 6: Manage and build your portfolio

For long-term success, stick with your strategy. Occasionally, review why you bought certain stocks. Diversify your holdings. And if you own dividend-paying stocks, consider reinvesting the dividends to build up the number of shares you own, as well as your total return.

But avoid looking at your portfolio daily; that will help you avoid emotional decisions, such as selling in down markets.

How to sell stocks

Selling stocks is as easy as buying them. The brokerage platform’s trade section will give you an option to buy or sell. You then enter the amount, either some shares or all, and place the order. But before you sell, you should review your strategy, as the “why” is more important than the “how.”

Why sell a stock?

Perhaps you believe the stock is fully valued, or overvalued. Full value reflects a security that is priced at its fair market value, or what market participants believe reflects a company’s full earnings potential. Overvalued means the share price is trading above a company’s earnings potential. The stock may have reached the target you set, such as rising 20% above your original purchase price. Or the stock’s price has fallen, and you don’t see it turning around. Those are all reasons you may decide to sell. If you sell a stock at a price above your purchase price, you will pay capital gains tax on the profits.

Tax-loss harvesting

Another reason you may decide to sell is for tax-loss harvesting purposes. In this case, a stock you like for the long term may be losing money. Say you bought a stock at $30, but now it’s trading at $20. You can sell the stock, record the loss, and in 30 days or more, buy it back, hopefully at a lower price.

The Internal Revenue Service lets you record the loss to offset capital gains taxes. If you attempt tax-loss harvesting, pay strict attention to the dates. If you buy back the stock less than 30 days after you sold it, the sale will fall under the “wash rule” and can’t be claimed for tax purposes.

Frequently asked questions (FAQs)