First-time stock buyer? Here’s everything you need to know
Welcome to the stock market!
Awesome! You’ve chosen to invest in stocks. Let me show you how you can buy your first stock(s), to start investing. And no, this is not as difficult as you think. In fact, today, it is much easier for first-time buyers.
Now, you can even start investing from your phones!
Also, let me take you through some stock market basics you need to know before and during your stock buying process.
Once again, welcome to the world of investing!
Decide what kind of an investor you are
Let’s start with the duration for which you’ll be keeping the stocks.
Do you plan to buy and sell stocks on the same day? Or would you be willing to hold them for a long time, say more than 5 years? The former, where you buy and sell stocks the same day, is referred to as trading. And, the latter, where you buy stocks and hold them for more than 5 years or so, is referred to as investing. The big players in the game like Warren Buffett, are investors.
Trading focuses on short-term profits. In simple terms, trading is like gambling in a casino. Sure, you might win some money once in a while. But ultimately, in the long run, you’ll lose, and the casino will win. If you’ve ever heard of people losing money in the stock market, that’s usually the traders. Investing, on the other hand, does not focus on short-term gains. It is a way to build your wealth consistently for the long term. Markets tend to have ups and downs in the short term, but in the long run, they consistently rise in value.
For example, between 1990 and 2020, the S&P 500 (a stock market index that tracks the 500 largest companies in the United States) produced a total return of 2,007.31% or 10.33% per year. That means to say if you had invested $100 in the S&P 500 at the beginning of 1990, you would have about $2,107.31 at the beginning of 2020. That’s how investors like Warren Buffet built their wealth over the years, making him one of the richest men in the world.
Another factor to consider is how much time you will spend on your investments after buying stocks. You have the choice to be actively investing – choosing individual stocks, regularly optimizing your portfolio, keeping up with the market, and researching new investments. However, if you can’t spare time for this, you have the option to invest passively – that would be index funds and exchange-traded funds (ETFs). With these passive investments, you can invest your money into any one of these, and forget about it. There is also the option to choose a Robo advisor, wherein an automated system chooses the stocks and invests for you.
Once you decide the duration of investment and your involvement in the process, let’s move on to opening a brokerage account.
Open a brokerage account
To buy stocks, you need a brokerage account. The easiest way is to open a brokerage account online. Most of the major brokerages allow you to open zero-commission accounts, which means there is no commission to buy or sell stocks. Most popular brokerages in the US include Fidelity, TD Ameritrade, Charles Schwab, and Robinhood.
Gone are the days, when opening an account was a real struggle. You had to be present in person at the brokerage office to start an account. Fast forward to today, opening a brokerage account online is as easy as opening a bank account. You fill out the application, provide identification, and transfer funds electronically to your brokerage account – all of this can be done online, even on your phone. Read our detailed guide on How to Open a brokerage account.
Even though most brokerages have adopted a zero-commission policy, be sure to go through the various fees involved. There might be an account maintenance fee and intraday charges, also make sure there are no hidden fees.
Once that is done, let’s pick some stocks for you.
A good rule of thumb is to buy shares of companies whose products you’ve used, or quite familiar with. As Warren Buffett says “Buy into a company because you want to own it, not because you want the stock to go up”. However, that shouldn’t be the only criteria to select stocks. A good way to start would be reading the annual reports of the company you would like to own. You can find that in the ‘Investor Relations’ of the company website.
These are the types of stocks you can start investing in.
These are companies that have been in the market for a long time and are less prone to market volatility compared to newer companies. These are generally large-cap companies with billions of dollars in revenue each year. It’s highly unlikely that they will be majorly affected by any negative news, hence a less risky option. Walmart (WMT) is an example of a blue-chip stock. With a market cap of $368 billion, they are the biggest company in the world by revenue. It is a good choice for a first stock.
Value investors focus on understanding a stock’s value by analyzing the fundamentals of a company. The idea is if you can read the fundamentals of the company and understand its financial situation, you can find undervalued stocks that will give you consistent returns in the long run. Value investing is followed by top investors including Warren Buffett and Bill Ackman.
Wells Fargo (WFC) and DermTech (DMTK) are examples of value stocks.
Generally, investors make money in the stock market by selling shares more than they bought them for. The idea is the longer you hold on to your stocks, the more valuable they will be (this is referred to as capital gains). Another way to make money from the stock market is to buy stocks that pay a dividend. These dividend stocks pay small cash payouts to the investors in specific intervals (mostly quarterly) for every share the investor owns. If you are looking to generate active income from your investments, dividends are the way to go. Coca-Cola (KO) and Walmart (WMT) are examples of dividend stocks.
With large companies like Walmart, it’s unlikely to see a high growth rate, and while the gains from the stock might be consistent, but it won’t be huge. That’s because they’re already a large business. Hence, there is very little room for high percentage growth. However, smaller companies have a lot to grow. Growth stocks are more volatile than stocks of larger companies, but it often rewards with their high growth, and thus exponential capital gains. While this might not be ideal for a first-time buyer, it can be added to your portfolio, once you get more familiar with stocks.
Decide the number of shares you want to buy
Now that we have the stocks to buy, the next question is, how many shares should you buy?
While there is no minimum number of shares you should buy, and no maximum either, it’s better to start small. Buy a single share of a company just to understand how it feels to own individual stocks. Some brokerages even offer the option of buying fractional shares, so instead of buying a full share of the company, buy fractional shares of several companies. This also allows you to get your hands on rather expensive stocks, like Amazon (AMZN) which currently trades at $2,977. This is also quite useful if you have limited capital or just want to start really small. You can add more stocks to your portfolio over time, as you’ll be constantly learning new things.
Many brokerages including Charles Schwab and Robinhood offer the option to buy fractional shares.
You’re all set to buy your first share. You’ve figured out the stock to buy, and you now know how many shares to buy. Let’s see how you can start buying.
When you select the stocks you want to invest in, you’ll see that you have two options regarding the type of order you can make. Namely, a market order and a limit order. Let’s briefly go over both of these order types.
With a market order, you are looking to buy the share as soon as possible, for the available current price. Since the order puts no parameters on the share price, the order will be fulfilled immediately. You might note, sometimes the price you bought the share for isn’t the same as when you made the order. This is because price fluctuations happen all the time. This price difference is negligible for the long-term investor, who plans to buy and hold these stocks for a long time, and hence the priority is to completion of the trade.
Limit order focuses on the price at which the trade should be executed. You have more control over the price with this order. Let’s say the stock Brookfield Asset Management (BAM) is trading at $50 per share. But you want to buy the shares at $48. With a limit order, you can set the price at $48, and the order will only be completed, once the price drops to $48 from $50. If you’re selling, you can set the price above the current price, say $52, and the trade will only complete once the price climbs to $52. Limit orders are mainly used by day traders, for whom even the slight fluctuations in the share price matter a lot.
Since you are buying a share or two, or a few, you can go with a market order.
Optimize your portfolio
Well done! You’re now officially an investor.
That was easy, wasn’t it? As you move ahead in your investment journey, things won’t always be the same. There will be good times when the stocks you own will skyrocket, and there will also be times when you see your stocks losing their value. Understand that every investor, at least once in their lifetime has gone through bad times. The key is to holding on to your investments and looking at the bigger picture, that is the long-term gains. Know that market fluctuations are not something that you can control. That doesn’t mean that you can’t do anything about it.
The first step to get through a bear market (generally used to indicate the market’s downward trend) is to diversify your portfolio. That will act as a protection during times of crisis. Diversifying your investments is investing your money in different asset classes (stocks and bonds), or across different industries (information technology, consumer products, automobile, etc.). As it is highly unlikely that all the markets will go down at the same time, your losses in some stocks will be balanced by gains from other stocks.
Make sure you have an investment strategy based on your risk tolerance (a measure of the risk you can tolerate), as your portfolio grows. A good strategy will ensure that you are consistent with your investments, regardless of the market performance. Dollar-Cost Averaging might be a good starting point. It’s where you invest a fixed amount every month. This will allow you to buy more shares when the market is down and less when the market is up, thereby being consistent with your investments.
Once you are familiar with stocks, it’s time to look at different options for investing. These are some of the most common options investors choose.
1. Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are funds that track a market index, sector, commodity, or asset. For example SPY, an ETF that tracks the S&P 500, has shares of all the companies on the S&P 500. The fund tries to mirror the performance of the underlying index. Like an index fund, ETF is also a great way to diversify your portfolio, as buying one share of SPY will give you exposure to the 500 largest companies in the United States.
2. Index fund
Index funds are a type of fund whose holdings track an underlying index. They buy shares of every company on the index it tracks, to try and mirror the performance of the index. Similar to an ETF, an index fund is also passively managed, which means that the investments aren’t chosen by professionals, they just try to mirror the index it tracks. The advantage of passive management is that the expense ratio is very low.
3. Mutual funds
Mutual funds are actively managed funds that take money from investors and invest in various assets like stocks, bonds, commodities, etc. Professionals manage mutual funds, allocate the money in different assets, and make capital gains for the investors. Since the fund is actively managed, the expense ratio is high, compared to ETFs and index funds. Even though they are actively managed, they generally tend to underperform the market.
Remember, stocks are not something you set and forget about. It needs frequent optimization to adapt to changing market conditions. Do your research to find potential growth industries, identify the key players, or companies that could become the key players, look at its fundamentals (financials, management, etc.), and invest.
Keep in mind that information will be abundant. From ‘experts’ on social media to the reporter on your favorite news channel, everyone will have an opinion on what you should buy and sell. Don’t get caught up in those. While it is important to keep up with what is happening in the market, the news should not determine your investment strategy.
Frequently Asked Questions
How do I buy stocks for the first time?
- Open a brokerage account online
- Transfer money to your brokerage account electronically
- Search for the company whose shares you would like to buy
- Select the order type
What is a good first stock to buy?
Whether or not a stock is ‘good’ depends upon various factors. A good way to start is to look at the fundamentals of the company i.e financials, management, industry growth, market share, etc. However, if you are not sure how to value a stock, check out this video that explains how we value a stock. Also, for your first stock, you can buy the top companies in the S&P 500 index, which tend to be less volatile and hence a less risky option for new investors.
How much money should a beginner invest for the first time?
While there is not an ideal amount to start investing, try to start with the money you need to buy a single share of a company on the S&P 500. Having said that, you can also start with as little as $100 or even $50, as many brokerages allow you to buy fractional shares, which will be less expensive.
Is it OK to buy 1 stock?
It is perfectly fine to buy just one share of a single stock. In fact, first-time buyers should try buying a single share, just to get a feel of owning a stock, and to understand the stock-buying process. You can add more stocks later on.
How do I learn more about investing?
The internet is a good place to start, as a lot of websites have guides for beginners. However, if you would like to learn how ordinary investors can beat the pros, check out our Amazon bestseller The 8-Step Beginner’s Guide to Value Investing.
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