Buying stocks for the first time can feel like playing a new sport. You may feel uncertain. You may question the wisdom of getting involved. The fees may seem confusing or too steep.
With sports, as with stocks, some knowledge, practice, and solid coaching can help you stay in the game.
And the stock market may be the biggest playing field of all — it can encompass the entire global economy.
What Are Stocks and How Do They Work
For at least 500 years, stocks have been a vehicle for investing in the larger economy. Buying stock in a company means you’re buying part ownership in the company.
Yes, owning just a few shares means you control only a minuscule portion of the company. But the shares are yours, and if the company grows in value, your shares will become more valuable, too.
You have no guarantee this will happen, and that’s the first rule you should learn about buying stock shares: You could lose the money you’re spending.
For this reason, you shouldn’t spend money on stocks until you have at least three months of living expenses set aside in a bank account.
A Quick Guide to Joining the Stock Market
When you have the financial flexibility to invest in stocks, you’ll first need a connection to the stock market. Brokers provide this connection in most cases.
Many investors still use in-person stock brokers to buy or sell stocks. Others open online brokerage accounts to access the markets. Now, a growing number of investors use robo-advisors which buy and sell shares of securities within parameters you set up.
Sometimes you can buy stock shares directly from a company, skipping the middle step of working with a broker. But most of the time, especially when you’re just starting out, a broker makes the process significantly easier.
How to Choose a Stock Broker
The term “stockbroker” can seem a little intimidating if you don’t already know a broker. You may envision someone in a stiff suit at a conference room table with charts and graphs in the background.
If you can open a bank account, you can open a brokerage account. You’ll need a little money and some form of identification. You’ll need basic computer skills when opening an online brokerage account.
You should also learn about a broker’s costs before signing up:
- Required Minimum Balances: You can easily find a broker that doesn’t require you to keep a minimum balance in your account. You’ll probably prefer one of these accounts if you’re just starting. Some accounts require up to $2,000 as an opening balance.
- Commissions and Fees: Many brokers charge a fee per trade that tends to range between $4 and $10. Others, especially robo advisors, may charge a flat annual fee as a percentage of your balance. And look out for extra fees like charges for leaving the account inactive for a specific time.
If you plan to trade stocks a lot, look for low commissions or an account with no commissions. But also find out what you’re giving up for these low costs. For example, will you be able to ask for help or get advice from an actual broker?
How to Choose Which Stocks to Buy
Once you’ve chosen a broker, opened your account, and deposited money into the account, you’re ready to choose some stocks.
This is where you can get bogged down. With thousands of choices, how do you decide what to buy?
Your broker can guide you. You can also read the research available in your online brokerage account: conference call transcripts, filings with the Securities and Exchange Commission, earnings reports, and annual letters to shareholders, for example.
Your stock choices could also reflect your investing goals:
- Long-term Stability: If you’re getting into stocks for the long-haul, you may gravitate toward companies with decades of steady, long-term growth.
- Investing Locally: Some investors like buying stock in a company with a presence in their hometown or even a company they work with. This makes sense; we tend to know a thing or two about our corporate neighbors.
- Values-based Investing: If you support military or environmental causes, you can find companies that feel the same way and put their beliefs into their business decisions. Just be sure you’re also thinking about the stock’s value as a financial vehicle.
This list doesn’t include the goal of earning quick cash because that can be a dangerous game. Most brokers urge you to ignore hot stock tips from friends, especially when you’re beginning.
For every overnight success you hear about in the stock market, you’ll likely find hundreds of overnight busts which don’t make the news. If you’d like to buy riskier stocks, incorporating them into a diverse portfolio offers a safer approach.
How Many Shares Should You Buy?
Some beginning investors feel pressure to buy a lot of stock shares. If they cannot afford such a position, they may get discouraged and decide not to buy shares.
There’s no need to think this way. You have to start somewhere. Buying even one share can begin a rewarding life in investing.
Most brokerages will try to lead you toward a diversified portfolio, which requires multiple kinds of stock. This can contribute to the need to buy a lot of stock.
Diversity is a worthy goal, and you should work toward it. But you can’t always achieve diversity overnight by buying shares of an individual stock. Consider exchange-traded funds if you’d like instant diversity.
A Stock-Ordering Glossary
The language of stock orders can also scare off some new investors: Stops, limits, market orders, bids, and so on.
Here’s a quick guide to this terminology, which should help you navigate your initial orders:
- Asks vs. Bids: The ask refers to the price a seller will accept for a share you want to buy. The bid refers to the price a buyer will pay for a share you want to sell. Essentially, the ask represents supply and the bid represents demand.
- Dividend Aristocrat: Every year, Standard and Poor’s puts out its Dividend Aristocrats index of dividend-paying stocks. Many investors consider this as the best of the best. It consists of some of the most profitable, best companies out there. These are places where you might want to invest.
- DRIP: These are Dividend Reinvestment Plans. They give investors a way to gradually grow their money. It is a tool that can help limit expenses paid to a broker while reinvesting dividends back into the same stock.
- Energy Stocks: The entire world runs off energy. Don’t miss out on investing in these stocks, because when prices take off (as they have before), you could regret it.
- Market Orders vs. Limit Orders: A market order is a request to buy shares right away at the best available market price; a limit order is a request to order shares at a price specified by the buyer when and if they become available at the stated price.
- Spreads: The difference in price between the highest bid and the lowest ask for a share. The smaller the spread, the more liquid the asset. A more liquid asset is easier to sell.
- Stock Options: Purchasing a stock option (call or put) gives the buyer the right to buy or sell a stock with no future obligation. Trading options can be extremely profitable.
- Stock Split: This is when a stock is split into multiple parts. The value of the stock doesn’t change, just the number of shares.
- Stop Order: If you place a stop order, your broker will place a market order once shares reach a specified stop price.
- Stop-Limit Order: With a stop-limit order, your broker will place a limit order when shares reach the specified stop price.
You shouldn’t stress too much about these terms. Asks and bids will seem natural once you start looking at stocks.
However, market and limit orders can directly impact your trading life. A limit order gives you the most control over the price you’ll pay for your shares, but limit orders can also prevent you from buying your shares: the price may never reach your limit.
With market orders, you’ll more likely be able to fill your entire order, but you’re buying at the market price which could even change between the time you place your order and when your order is filled.
When to use market orders: When you’re not too concerned about the specifics of your prices because you’re planning to hold the stock for a while, you may as well place a market order.
When to use limit orders: Limit orders will be useful with more volatile stocks or when you want a stock only if you can buy it at a specific price. Limit orders can cost you more in broker commissions because your broker may have to make several transactions to fill your entire order.
Buying Stocks vs. Investing in Stocks
Buying and investing in stocks may seem like two terms for the same concept. But you can buy a lot of stock shares without ever doing much investing.
Investing requires thoughtful spending with the specific goal of growing your money over time. Stocks are simply one tool to help you pursue this goal.
Characteristics of investing in stocks include:
- A Long-Term Perspective: You can earn some short-term money buying low and selling high, but investing is a long game. Markets have bad years and good years. History shows the market increases in value, and people who remain patient tend to see long-term gains.
- A Thoughtful Approach: You don’t have to be an expert on a company to buy its stock, but understanding how a company earns money within its business context will give you more insight into whether to invest.
- An Ability to Gauge Worth: A stock’s ask does not always reflect its value. Relying more on research and less on a stock’s current share price to determine its value will help you avoid paying too much to invest.
- A Diverse Portfolio: A more diverse collection of stocks will be better equipped to weather a financial storm. For example, if your technology stocks take a hit, maybe holdings in cosmetics companies or healthcare suppliers can buoy your portfolio.
- Diversity Beyond Stocks: Most financial advisors recommend dedicating a relatively small percentage of your portfolio to stocks. Other, more stable securities such as mutual funds, exchange-traded funds, and bonds can comprise the bulk of your investment portfolio.
Should You Invest in Individual Stocks or Stick with Index & Mutual Funds?
Mutual funds and ETFs are essentially portfolios of stocks and bonds. They may include just a few securities in a specialized sector or hundreds in more general categories, such as the S&P 500.
There are tremendous advantages to investing in funds. One is professional management. A fund is managed by an investment professional who manages the entire stock portfolio. That means you don’t have to get involved in constructing the portfolio, buying and selling individual securities, or rebalancing the investment allocation as needed. You simply invest your money and turn the management over to someone who does it full-time.
There’s also the diversification aspect. By investing in the fund, you can spread your money across dozens or hundreds of individual securities with an investment of just a few thousand dollars. That’s a level of diversification you could never achieve if you try to construct your do-it-yourself portfolio.
And finally, there’s the cost factor. By investing through a fund, you’ll avoid having to pay commissions on a large number of stock transactions. There may or may not be a single commission involved in purchasing the fund, but it will be a lot less than the collective costs of commissions on buying multiple stocks.
You can considerably improve the cost factor by investing in no-load funds or index funds with very low expense ratios. And typically, if you hold funds through a fund family, there are no commissions or loads.
The entire fund concept is hard to beat, especially for small investors.
The Benefits of Individual Stocks
Is there any reason to invest in individual stocks if funds are so great? That’s a mixed bag since it depends on several factors. One is your skill level in choosing investments.
Some people develop the skill and spend a lifetime trading individual stocks. Some even get incredibly wealthy as a result. But should you try it if you’ve never done it before? There are some advantages.
When you invest in individual stocks and pick the right ones, you can earn returns dramatically higher than what you can get with most funds. Fund diversification limits gains, at the same time that it minimizes losses.
You may have to be content to earn 7% to 10% in annual returns with funds. But an individual stock can double or triple in a year. Some stocks rise many times over, over several years. That’s not typical, but you only need a few of those each year to improve your portfolio performance.
It also makes sense to invest in individual stocks if you have a strong knowledge of a particular industry. For example, if you work in the IT field and have a solid handle on the big picture of the industry, you might have real potential to earn high returns in the IT sector.
But even beyond being a trader, if you have the insight and the patience to buy and hold stocks of well-established companies that pay above-average dividends and show long-term growth patterns, you can outperform the general market over the long term.
The Risks of Investing in Individual Stocks
Despite the advantages of investing in individual stocks, there are significant risks. That’s why so many experts recommend fund investing for small investors.
Here are some of those risks:
You may not have the skill level necessary. It’s a fact that most fund managers often underperform the general market. If that’s the case for professional investment managers, what chance do individuals have? The reality is that most people don’t have that ability and are more likely to sustain large losses than large gains.
Bad calls. Just as it only takes a few winning stocks to pull up an entire portfolio, it only takes a few to produce large losses. Sometimes even if you know what’s going on with a company, you can still be blindsided by unexpected events. For example, I once purchased a stock recommended by Money Magazine at $20 a share. A few months later, it was a penny stock. I don’t remember the circumstances, but it happens in the real world.
Lack of adequate diversification. True diversification is more complicated than most people understand. It’s not just creating a portfolio of multiple stocks. You must ensure your money is spread across various sectors and unrelated asset classes. That means investing beyond stocks, including allocations in other investments, such as bonds, real estate investment trusts, or even commodities. You may know a lot about a particular industry sector but little about other sectors, let alone other asset classes.
A stock market crash. We’ve had two of these since 2000, so it’s something that has to be considered. This is also the whole purpose of adequate diversification. If you are invested too heavily in one or two stock sectors that seem to be successful, these may get hit harder in a crash than the general market.
Bad timing skills. We just discussed market crashes, and this is where timing plays an especially vital role. It’s easy to get emotional about investing since it involves your money. But that also means you can buy too heavily at market tops and then panic sell at the bottom of a crash. Both have the potential to create very large and long-term losses.
These risks are what keep a lot of small investors from wandering into individual stocks.
Do Individual Stocks Have a Place in Your Investment Portfolio?
None of this suggests that individual stocks shouldn’t have a place in your investment portfolio. But if you are a new or small investor, it’s clear that most of your money should be invested in funds. That will enable most of your portfolio to at least keep up with the general market.
If you are interested in a certain market or certain companies, you may want to consider holding a few individual stocks in your portfolio, along with those funds.
Suppose the stocks you purchase represent companies with proven long-term track records of growth and a consistent record of paying out dividends. In that case, they may provide an opportunity for you to increase your overall portfolio return.
Just don’t get carried away! Wall Street says that little pigs become fat pigs, and fat pigs get slaughtered. So tread lightly with individual stocks until you have a track record and the confidence to delve deeper.
Leading Options for Stock Brokers
Earlier in this post, we briefly discussed the importance of finding a good broker. An in-person broker at a big-name firm like Charles Schwab or Fidelity can coach and guide you. You’ll also pay higher commissions and may need higher minimum balances in your account to get started.
Many beginners want to try investing without making a commitment or even an appointment. In this case, a discount online broker can help.
You should always do your research before committing to a broker — even a discount online broker. But I would like to share some of my favorite brokerage options:
Ally Finance bought the discount brokerage TradeKing, which was always one of my favorites back in 2016. I’m happy to say Ally Bank has maintained and even strengthened TradeKing’s tools and features.
Ally Invest has a user-friendly interface, lower-than-average trading fees, great tools for learning, including webinars, and easy-to-use tools for managing your tax exposure.
Check out our full review of Ally Invest and get started with your own account here.
E*TRADE, one of the original options for trading online, continues to grow and lead in the market. The firm now has an online bank which makes transferring money in and out of your brokerage account even easier.
You can find cheaper options, but you may not find a more complete set of features in one place.
Check out our E*TRADE review or get started with your own account here.
TD Ameritrade rates well as an in-person and online brokerage. Again, it’s not the cheapest option in the marketplace, but beginners who plan to research their options before buying shares can find top-notch resources here.
This level of support often requires an account minimum, but this isn’t the case with TD Ameritrade. You can start with any amount of money.
Check out our full TD Ameritrade review.
Firstrade has been around longer than the World Wide Web. When placing an order, you’ll find low commissions, margins, and quick response times.
Firstrade offers retirement accounts and education savings accounts along with its discount brokerage accounts with low commissions. Firstrade is particularly popular among active traders.
Read our full Firstrade review to learn more specifics.
A Couple of Robo Advisors to Try, Too
Robo-advisors have changed investing. With a robo, you deposit money and let a computer algorithm buy and sell on your behalf. The algorithm looks for trades to help you reach your stated goals.
Most robo advisors rely on ETF trading, but some allow individual stock trading. Here are a couple to try:
- M1 Finance: M1 Finance lets you add stock shares to your investment “pies,” visual representations of your portfolio. You’ll need $100 to open an account or $500 to open a retirement account. Then, you can use M1 Finance for free — no commissions or flat annual rates.
- Betterment: One of the original successful robo advisors, Betterment still leads the industry. Rather than charging commissions, Betterment charges 0.25 percent of your account’s balance each year. (You can opt for Premium services for 0.4 percent annually.) Betterment will invest your money in stock-based ETFs but not individual stocks.
Choosing Your Broker
If you’re considering a broker that’s not included on this list, make sure your choice is:
- Easy to use: This is particularly important if you’re a beginner. Dealing with a clumsy interface can make learning about stocks more difficult.
- Clear about pricing: Surprise fees can cut into your earnings. Make sure you know how your broker plans to charge you for trades.
- Affordable: Assuming your broker is clear about its price structure, make sure you can afford the service. Check on minimum balances and per-trade fees. If you’re going with a robo, make sure you’re comfortable with its annual percentage.
Bottom Line: The Game Should be Fun, Too
You may not become the next Warren Buffet. You probably won’t get rich overnight. But those aren’t realistic goals for anyone, especially beginning investors.
Instead, focus on learning the ropes and finding your own identity as an investor. If you work with an in-person broker, listen to his or her advice, but decide for yourself.
You do have your financial future to think about, so don’t invest money in stocks you can’t afford to lose. Beyond that, just try to have fun. Stock investing is a great game.