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How to buy stock

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Most investors choose to buy stock in publicly traded companies by opening a brokerage account and transferring money from a bank account to buy individual stocks.

When you buy a share of stock, you are establishing partial ownership of a publicly traded company. Shares are bought and sold in a marketplace (an exchange). Prices are set according to supply and demand inside that marketplace.

How does buying stock work?

People buy stock because there's a chance that the price of the stock will rise above the price they paid. This may happen quickly, or it may take decades. You can sell stocks at any time. If the stock price appreciates and you decide to sell the shares, you could make more money than if you put the money into a money market account or other investment vehicle.

Identifying individual stocks with a high potential for growth can be tricky, but it can also be lucrative. However, there's a real risk that you'll lose money if the stock price goes down and you decide to sell.

Over the past 10 years, an index of 500 top companies in leading industries in the United States (measured by the S&P 500 index) has risen 273% at the time of publishing. High-yield money market accounts offer 0.5% interest annually. You can't lose money with a money market account, but the returns likely won’t keep up with inflation.

Steps to buying stock

If you’re interested in investing in the stock market, you can begin by following these steps.

1. Open a brokerage account.

Opening a stock brokerage account is fairly straightforward. With a brokerage account, you can purchase stocks, bonds, exchange-traded funds (ETFs) and mutual funds.

You need to give some information that’s required by the federal government to open a new account, including your full legal name, address, Social Security number, birthdate and contact information. You'll also need the account and routing number you'll use to fund the brokerage account.

2. Choose the stocks you want to buy.

Deciding which stocks to buy can require a lot of research — it's the part of the stock-buying process that should take the most time. One of Warren Buffett's most famous rules for growing wealth is to never invest in something you don't understand, and that applies to individual stocks as well as other investment types.

Before you buy a stock, it's essential to know about the company. Research the leadership and structure of the business. Look into its history and check out how stock prices have risen and fallen in the past. Look at the company's balance sheets to see if it's a stable organization.

It's important to be able to find stocks with strong earnings per share growth over time, a decent return on equity and stable yet growing profit margins.

Here's how a potential investor may evaluate those benchmarks:

  • What are the earnings per share (EPS) growth patterns? The EPS shows how much a company is profiting for every share of stock, which indicates its profitability. If a company has an EPS rate of $10 in 2019 and an EPS of $12 in 2020, its growth rate is 20%. This suggests that the company's profitability is growing. A company that grows over multiple years has an ROE with an upward trajectory.
  • What is the company's return on equity (ROE)? Return on equity is the net income of a company divided by shareholder equity (assets minus debt). The company's ROE shows how effective it is at turning its assets into profits. If a company had a net income of $10 million last year, assets of $50 million and debt totaling $20 million, it has an ROE of 33%.
  • What is the company's profit margin? Profit margin measures how effective a company is at turning sales into profits. Can the company keep costs low while increasing the potential to profit? With profits of $100,000 and total revenue of $1 million, a company has a 10% profit margin.

3. Consider mutual funds.

Investing in a mutual fund lets you put money into the stock market, but you purchase a share of a professionally managed stock portfolio instead of individual stocks. This gives you the advantages of a diversified portfolio without having to dig into the research on each individual stock on your own.

Stock mutual funds may come with management fees that could reduce your long-term returns. If you choose an ETF, which is another type of mutual fund, there may be lower fees. Be sure to research your options carefully and understand the associated costs before investing in any type of mutual fund.

4. Consider using a stock-picking advice service.

There are about 41,000 publicly traded companies worldwide. Finding a stock with a stable business structure and a strong potential for growth is a needle-in-the-haystack problem. For this reason, even seasoned investors depend on stock-picking services to help inform their decisions.

It's OK if you can't justify spending money to get advice about which stocks to buy. There are several services, such as The Motley Fool or Zacks Investment Research, with information for new investors that offer free advice.

The downside to subscribing to informational emails from these companies is that you will be constantly targeted for an upgrade. Be warned; these stock-picking services employ some of the most talented and persuasive copywriters in the world. You will receive daily emails that make it seem like a very good idea to hand over your credit card information.

Their services may be well worth every penny you spend on them, but much of the material is written for more experienced investors. While you may want to invest in one down the road, it's OK to stick with the free information included in the emails for now.

5. Execute an order to buy stock.

Each brokerage firm has its own platform, so it's smart to spend some time learning how to find the information you need before you begin purchasing stocks. The best brokerages offer tutorials that serve as a virtual site tour, so take advantage of that information and learn your way around before you transfer your money to the brokerage.

When you execute an order to buy a stock, there may be a fee. Many brokerages no longer charge fees, but always check to avoid an unpleasant surprise.

After you execute an order, the brokerage will move money from your cash account held at the brokerage and buy the stock on your behalf. Not every brokerage allows investors to buy part of a share. You may need to purchase a whole share of a company.

If you're interested in a service that lets you invest in established companies like Disney, Nike or Apple without having to hand over hundreds of dollars to buy a single share, search for a brokerage that lets you purchase fractional shares. Stash, Webull and Betterment are three examples of firms that offer this service.

6. Monitor your stock's performance.

You can usually monitor your stock's performance online. Your brokerage probably has a tool that makes it easy to see the current and historical performance of each of your stocks.

Many online brokers provide free stock screening tools to help potential investors understand a company's EPS, ROE and profit margins. Before you purchase an individual stock, it may be wise to add it to a watchlist and see how the price of the stock changes over time.

Frequently asked questions

When is a good time to buy stocks?

There isn't necessarily a “good” time to buy stocks. In general, if you buy stocks when the market is down, you may have a better chance of making money as the market recovers.

Can I buy stocks without a broker?

Yes, you can buy stocks without a broker. Direct stock purchase plans (DSPPs) let you buy shares of stock from the company directly. A transfer agent facilitates the trade for publicly traded companies.

The individual companies determine the minimum amount of stock they are willing to sell to an investor through a DSPP. There may be lower fees with a DSPP, and you may receive a discount for buying directly from the company.

How much money do I need to purchase stocks?

Purchasing individual stocks can cost just a few cents, depending on the brokerage and its fees. Penny stocks are the least expensive option, priced between 1 cent and 99 cents per share.

What are the best stocks for beginners?

Start with established companies with long track records of upward mobility with their stock prices. Look at a company's metrics, but also pay attention to its stock's stability over a number of years.

Bottom line: Should I buy stocks?

Purchasing individual stocks is riskier than investing in mutual funds, but both options let you potentially profit from the growth of publicly traded companies. Over time, a solid portfolio can outperform the stock market as a whole, often referred to as “beating the market.”

Even if your stocks don't beat the market, a carefully curated group of stock investments could yield a higher rate of return than a savings account or money market account.

When purchasing stocks, remember that you could lose money. So take it slow, invest in companies you understand, and don't put money into the market that you can't afford to part with.

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