How to Buy Stocks: Explained Simply
I get a lot of questions from my friends and readers of this blog who are new to the investing world about how to buy stocks. There are a few options for buying stocks, but the one I like the best (by far) is using an online discount brokerage. You can go with a full-service brokerage, but they are far more expensive and also quite unnecessary.
Full-service brokers help you choose which stocks to buy and then can also assist you in executing the trades, serving in a kind of advisory role. Online discount brokers allow you to buy stocks but you’ll be entirely on your own in terms of selecting them and executing the trades. With a bit of self-education, it’s actually quite easy to pick and buy your own stocks.
Here’s what you need to do to buy stocks:
Step #1: Sign-up for an Online Brokerage
I use Interactive Brokers because they are cheap, have a massive range of things you can buy and give very detailed performance reports. It’s actually the choice of a lot of professionals. But, going along with that, it’s not exactly user-friendly for the absolute beginner. However, they are more flexible in terms of country of residence/passport holding country requirements, so it’s a good choice for expats looking to invest in the stock market. Their sign-up process is reasonably simple and even though I was living in South Korea (I’m Canadian) at the time, I remember it only taking a week or so.
Sogotrade is a good choice for beginners from the USA because their trading fees are some of the cheapest in the industry and they have an extremely simple trading platform. It’s far simpler to use than Interactive Brokers and even a total beginner can figure it out really easily. Per trade, the fee is $3-5. I used them until they told me they were no longer accepting Canadians who live abroad as their customers!
Questrade is a good option for Canadians looking to buy stocks. It’s quite similar to Sogotrade in terms of cheapness and ease of use. The trades are between $4.95 and $9.95, which is the cheapest you’re going to get if you’re Canadian. They seem to specialize in customers new to investing so expect some excellent customer service and assistance along the way.
Step #2: Fund your Account
Brokerages have various minimums required to begin investing in the stock market, ranging from $1,000-10,000. You just do a wire transfer or direct deposit, which are the two simplest ways to fund your brokerage account. There are other options too, particularly if you’re funding a brokerage account in the country that you reside in. For example, an American using Sogotrade, which is an American company.
Step #3: Do some Research, then do some More!
Ideally, you would have already spent at least one hundred hours researching about investing before you get to this step. It really is important to put the time in to understand the basic investment strategies (I use dividend paying stocks, but also love ETF investing) as well as key concepts like:
- Managing fear and greed
- What to do when the stock market crashes
- Trading vs. investing
- The Rule of 72
- The 4% rule
The more knowledge you have about investing before you begin executing your trades, the better off you’ll be.
Step #4: Buy Stocks Online
The final step after opening your account, funding it and figuring out your investing strategy is to actually buy stocks.
I use GTC (good to cancel) limit orders, instead of market orders. With a market order, you just buy whatever amount of stock you’ve asked for at the “market” price. The market price is what the stock is currently trading at, of after hours, what is starts trading at the next day. With a limit order, you set a certain price that you want to buy at and if it hits that price, or lower, you’ll buy. If not, the order just continues until you cancel it, or it reaches the price you set and gets filled.
Patience is the key here! Stock prices will eventually go down and a big part of getting a good overall return is buying stocks when the prices are low (generally thought to be when P/E ratios are less than 15). When stocks prices are rising and everyone is buying, you shouldn’t be. When stock prices are falling and everyone is selling, you should be buying. The best strategy is to now follow the herd and to actually do the opposite of what they’re doing.
Sounds simple? The actual process of buying stocks is quite simple. It’s making money that’s the far harder thing!