Stocks 101: A Step-by-Step Guide to Purchasing Stocks Online [2019 Edition]
What Are Stocks?
In simple words, stocks are an avenue to build wealth.
They are mostly an investment, which means you own shares in the companies whose stock you purchase.
Stocks holdings are how most people invest in various successful companies across the globe.
For a company, stocks are one of the best ways to raise money to fund various initiatives. They might use the funds raised from their stock offerings to launch new product lines/products, to pay off debt, invest in growth, or even to expand their operations.
In effect, when you purchase some company’s stock, you are buying ownership shares in that company. It also means that you have the right to vote at the company’s meetings if you decide to exercise it.
However, the main reason why investors own stock is to get a good return on their investment. This typically takes place in two distinct ways.
- The stock price increases, and you can sell the stock if you like and earn a profit.
- Some stocks also pay dividends (not all of them though). Dividends are the payments the company makes out of its revenue, to its shareholders. These are generally paid quarterly.
How To Buy Stocks For Beginners
Companies sell shares in their business to raise money.
They mostly start to issue shares in their stock via a process called an IPO (initial public offering).
Once the company puts its stock on the market, it can be purchased & sold by investors.
If you decide to purchase a particular stock, you’ll often not complete the task from the company itself, but via investors that want to sell that stock.
Similarly, if you're going to sell some stock, you'll sell that to some other investors that want to buy it.
If you check online using a term like 'buying stocks for dummies’ you will find that all of these trades are handled via a stock exchange, with brokers representing every investor.
However, many investors are interested in knowing how to buy stocks online without a broker or even more about buying stocks via an app.
They prefer to use online stockbrokers, selling, and purchasing stocks via the broker’s trading platform that connects them to the exchanges.
In case you haven’t got a brokerage account, you’ll have to register for one to purchase stocks.
Where to Purchase Stocks
Here is some more information about the credible online stock trading platforms you could consider:
Etrade is an online platform where you can trade various financial assets such as preferred stocks, common stocks. ETFs, mutual funds, options, fixed income investments, as well as futures contracts.
In addition, it offers other functions such as advisory services, online banking, cash management services, and employee stock ownership plans. It charges a trade commission that is slightly higher than discount brokerage firms.
However, Etrade has an impressive library of tools, professional-level trading platforms, and educational resources that are valuable resources for seasoned traders as well as beginners.
The platform is ideal for:
- Beginner investors
- Experienced and frequent traders
- Data and research
- Commission-free ETFs
- Retirement planning assistance
This free-trading app is perfect for investors that want to trade options, cryptocurrency, ETFs, stocks, without paying any fees or commissions.
Robinhoods’ innovative offerings cut out almost all the costs that are generally linked to any form of investing.
While the platform offers mobile and web trading functionality, both these platforms are very basic, which is why some frequent investors tend to find accounts and tradable securities options lacking.
Robinhood works best for:
- Frequent options, ETF, or stocks traders
- Individual taxable accounts
- Mobile users
- Margin accounts
Stash is a popular investment app that helps make the process of choosing investments, especially ETFs and stocks, simple and quick for those who are just starting with investing.
It has a lower fee for balances below $5,000 and a different annual fee for larger balances. While you need a minimum of $5 to begins investing, the minimum balance is $0.
The platform has different fee structures for other categories. If you choose to go all-in with this platform, they also offer an online bank account as well as a cashback debit card. Stash is best-suited for:
- New investors
- Investors that want guidance selecting their investments
- Impact/thematic investors.
Charles Schwab is a very versatile online trading platform that caters to a range of investor types. Those who are just starting on their investing journey will find all the information they need to get started on the right foot.
The sophisticated trading platforms, functions, and robust tools become an attraction point for frequent traders.
Charles Schwab also has an impressive selection of zero-transaction-fee mutual funds and many different research offerings.
Recently, the company announced its plans to reduce its minimum investment to $0. They are also going to double the total number of commission-free ETFs offered.
These changes will put it on par with most of its rivals. Charles Schwab is excellent for:
- New investors
- Frequent and experienced traders
- Investors who want commission-free ETFs
- Investors that want no-minimum index funds
- Investors seeking premium research functions
When you are deciding which online trading platform will work for you, it is important that you conduct some research.
Consider which of their services, tools, and research offerings will suit your needs and provide value for money before making your final choice.
It’s best to get some advice from an investment expert before you register and start trading regularly.
How To Buy Stock Directly Online - The Steps
Step 1: Know What Your Options Are For Buying Stock
In many movies, we all have seen enthusiastic and noisy traders shouting orders on the stock exchange floor.
However, nowadays, not many stock trades take place in this way. As mentioned earlier, there are different ways to trade in stocks:
- Via a full-service stockbroker- These professionals will guide you through the entire process of selecting stocks, making stock recommendations, and placing orders on your behalf.
- The downside is that you will pay sizeable amounts as service fees. So it does take long for these hefty fees to eat into your investment returns.
- Directly via the company that issues the stock- When you buy the stocks yourself from the company, it helps you cut costs. However, you would then have to go to every single company that you want to invest in individually. It's also essential to know that not every company sells stock directly to the investors.
- Via an online stockbroker- For most, the easiest and best option is to purchase stocks online via online stockbrokers. While you can't buy stocks online free, these brokers offer lower costs as well as the ability to purchase the shares you want from practically any public company in the United States.
Step 2: Register for an Online Brokerage Account
Opening up an online brokerage account is quite simple and almost like setting up a new bank account.
You would need to complete the account application, provide ID proof, and decide how you will be funding that account.
You have the option to transfer funds electronically or mail a check. Some credible online trading platforms include Etrade, Robinhood, Stash, Charles Schwab.
While the process of registering for a brokerage account isn't very complicated, it's crucial that you zero-in on a good and reliable broker.
It isn’t just about finding a broker that has the lowest trading commissions.
There are some other things to consider when opening up a brokerage account, such as:
1. The Amount Of Money You Have
Most online brokers maintain a $0 minimum requirement to set up Roth IRA or a regular individual retirement account.
For regular brokerage accounts, the minimum amounts can be in the $0-$2,000 range or more.
2. The Frequency At Which You Plan To Trade In Stocks
Most online brokers like Etrade, Robinhood, Stash, Charles Schwab are suitable for new investors. Every company sets its online stock trading commissions, and these can run from $5 to $10.
Lower commission costs will be more crucial to those who trade actively (traders that place 10/ more trades every month). If you are going to invest infrequently, it’s best to steer clear of brokers who charge inactivity fees.
3. The Amount Of Support You Need
An online broker will not offer guidance with your investment decisions. However, it is also essential that they provide robust trading tools and excellent customer service.
Check what types of offerings they have in terms of stock trading, investment research, and educational tools.
It's also vital that you be able to access them via online chat, email, and phone or even via their branch offices.
4. Select The Stocks You Want To Purchase
Once the brokerage account setup has been completed and you have fund edit, the next step is to and move into the stock-picking stage.
An excellent place to start is to research companies you already have some information about from your overall experiences as a consumer.
It’s essential that you don’t let the flood of real-time market gyrations and all the available data overwhelm you while you conduct the research.
Maintain simple objective- You are looking for some good companies that you want to own shares in.
These are some steps to follow while selecting stocks:
- Start with the specific company’s annual report- the annual letter that the management sends to shareholders. This letter will give you an overall view of what’s happening with the company and provide some context for the numbers that reflect in the report.
- After this step, most of the analytical tools & information you’ll need to evaluate that business will be available on the online brokerage site.
This information will include things like recent news, quarterly earnings updates, conference call transcripts, as well as SEC filings.
Most online brokers also post basic seminars on how to select stocks and tutorial on how you can use their tools.
Step 5: Decide How Many Shares To Buy
Never feel pressured to fill your whole portfolio or buy a specific number of shares in one shot. Start small and buy one share to get a better understanding of how it feels to own some individual stock.
It will also allow you to get a feel of whether you have the determination to navigate all through patches without too much stress.
You can also add to your position over some time as you get a better understanding of how these systems work.
Step 6: Choose The Type Of Stock You Want
There are different types of stocks to choose from, and this is also an important aspect to consider when you are thinking – 'How do I buy stocks myself?’
There are two main types of stocks- Common stocks and Preferred stocks.
As the name suggests, these stocks are common, and these are the ones that people are referring to when they generally talk about stocks; most of the stocks issued on the market are in this form.
Common shares indicate ownership in a particular company as well as dividends on a portion of the company’s profits.
An investor gets one vote per share when electing the company’s board members, who are responsible for overseeing all the major decisions made by the management team.
Over the long term, due to capital growth, common stock yields much higher returns than most other investments. These higher returns come at a cost because common stocks carry the highest risk.
For example, if a company liquidates or goes bankrupt, people that hold common stock won't receive any money till the time the company has paid the creditors, bondholders, and shareholders.
This stock represents a certain degree of ownership in that particular company. However, it generally doesn't come with the same voting rights. (This might vary depending on which company it is.)
A preferred shares investor will usually have the guarantee of a fixed dividend forever.
This is why preferred stock is different than common stock. The latter has variable dividends, and these aren’t guaranteed.
Another advantage of preferred stock is that in the event of the company's liquidation, the preferred shareholders will be paid off before the common shareholders (but after the debt holders).
It’s essential to keep in view that preferred stock might also be callable, meaning the company has the option to buy their shares from shareholders at any time and for any reason (usually at a premium).
Some consider preferred stock to be far more like debt than equity.
These kinds of shares are somewhere between common shares and bonds.
Exchange-Traded Fund (ETFs) are pooled securities that you purchase/ sell via a brokerage firm on stock exchanges. Exchange Traded Funds are offered on almost all the different asset classes, including traditional investments as well as alternative assets such as currencies or even commodities.
Exchange-traded funds are valuable and very important products that have been created in recent years for individual investors.
ETFs offer several benefits and, when used wisely, become an excellent vehicle for investors to achieve their investment goals.
Additionally, innovative ETF structures also allow investors to short markets to avoid short-term capital gains tax and gain leverage.
About Mutual Funds
Mutual funds are a collection of bonds, stock or other similar securities.
When you purchase mutual funds, you own the share of that mutual fund. The price of every mutual fund share is referred to as its net asset value or NAV.
When you purchase mutual funds, you own the share of that mutual fund. The price of every mutual fund share is referred to as its net asset value or NAV.
That is the total value of all the securities it has ownership of, divided by the total number of mutual fund shares.
The trading of mutual fund shares occurs continuously. However, their prices adjust at the end of every business day.
About Stock Funds
Stock funds typically focus on publicly-traded companies, on any of the stock market exchanges. Certain mutual funds invest based on the company's size.
These are large, mid or small-cap funds. Others will invest in different types of companies:
- Growth funds usually focus on innovative firms which are expanding at a rapid pace.
- Value funds focus on the companies that others might have overlooked.
- Blue chip funds have several value companies. You may prefer funds that focus on companies which issue dividends. A large majority of these are also value or blue-chip companies
- High tech funds might even have several growth companies.
- Many funds are specific to geographical locations- Domestic funds only purchase U.S-based companies. International funds can select the best-performing countries across the globe.
Now that you have some necessary information about what stocks and mutual funds are, the next question that might arise in your mind is- which ones are better? Should I invest in stocks or mutual funds?
While there is no clear-cut answer to this question, there are some things you should consider to come to a decision.
If you prefer not to research every company’s financial statements and don’t want to figure out how to buy stock in Amazon, its best that you invest in mutual funds.
These will provide you instant diversification in your investment structure. It’s also why mutual funds are far less risky compared to individual stocks.
If one particular company goes bankrupt, at least you don't lose all the money you have invested.
So you benefit in many ways when you invest in mutual funds, but it’s essential to recognize that mutual funds are also subject to market risks.
ETFs Vs. Actively Managed Funds
Regardless of which mutual funds you buy, they are either exchange-traded or actively-managed. The latter have managers that decide which securities to purchase and sell.
They have a set goal which guides the investment decisions they make. The managers seek to outperform their index by way of trading securities.
It’s also why they charge higher fees. These funds have to exceed both their higher fees as well as the index.
In comparison, exchange-traded funds will always match an index. Since they do not require much trading, their overall costs are also lower.
This is why ETFs have become very popular since 2008 (the Great Recession.) To pick excellent mutual funds, it’s imperative that you understand your investing goals.
If you are looking for a long-term retirement investing option or setting aside some additional cash for a rainy day stock funds are the best option.
On the other hand, money market funds are ideal for short-term savings. Since there are so many options involved in buying stocks, when you are starting, it's best to work with a credible certified financial planner.
They will help you determine the best-suited investment strategy and the asset allocation that will suit your circumstances and investment goals.
When it comes to investing, it’s important to have a full understanding of what’s involved, the benefits and risk, etc.
Stocks are typically riskier than mutual funds. By pooling various bonds in a bond fund or stocks in a stock fund, mutual funds tend to reduce investment risk.
This is because if one particular company in the mutual/stock fund has a losing strategy, a poor manager or even a stroke of bad luck, that loss gets balanced out by other businesses that are performing well. It’s the diversification aspect that lowers the overall risk.
For that reason, many investors, especially when they are starting, feel that mutual funds provide all the benefits of stock investing without most of the common risks.
As mentioned, it’s always a good idea to consult a knowledgeable and credible investment expert and get their advice on an investment strategy that would work for your situation and wallet.