This is the final article in a three part series meant to give you all the tools you need to invest in the stock market. Hopefully you’ve checked out the 5 Basic Questions to Ask Yourself Prior to Investing in the Stock Market and you’ve checked off all of the prerequisites. You should also read my post 33 Questions I Use to Research and Select a Stock and start brainstorming some stocks to review and potentially buy.
With the basics covered, let’s get started learning how to buy and sell stocks!
Boring Legal Disclaimer: I am not a financial expert, advisor, or even an analyst by any stretch of the imagination and these are my opinions. However, I’ve watched, read, and listened to enough of them to know the basic approaches to purchasing a stock or mutual fund.
This article does not explain crazy tax loopholes, it does not attempt to confuse the matter with complicated financial jargon, and it certainly does not guarantee that by doing this you will make any money.
But here are 6 simple steps for how to invest in the stock market:
1. Select an Online Broker to Use
In this case, “Online Broker” is just a fancy word for “company that lets you buy and sell stocks using their online platform”. Just like Ebay let’s you buy and sell items, an online brokerage house provides the platform to buy and sell stocks.
In the past, they used to charge a commission fee anywhere from $4 to $10 dollars per purchase or sale, but thanks to heavy competition and technological advancements, most of the major players have moved to free transactions. They still make their money by selling add-on services and premium data analysis tools, however, you should be able to invest commission-free in 2020 and beyond.
Just like when I compare credit cards or online savings accounts to find the best rates or promotions, I like to compare promotions from the various online brokers that would like me to use their online portal. Nerdwallet is a trusted source for financial lists like this so I am providing a link here to their recommendations of the 11 Best Online Brokers for Stock Trading of August 2020. You can’t really go wrong choosing a service from this list. For transparency, I use one of the companies on this list.
2. Open and Fund Your Account
This is a really easy step and shouldn’t take more than 15 minutes. You’ll need some basic information such as your address, social security number, and bank account information. The account you are generally going to select is an individual brokerage account.
That is unless you want to open an IRA which is a Retirement account. There are pros and cons to both; check out this article which explains the differences. If you just want to open a regular account to make purchases and sales, an individual brokerage account is for you.
Link your bank account, transfer a reasonable amount of money (50 dollars or 500 dollars; it doesn’t matter as any amount is perfectly fine to start with) and familiarize yourself with the website and options available to you.
Be prepared for the account to take up to a week to have any amount available for investing. It doesn’t matter how much you are planning to invest with so long as it is not part of your safety net of savings and you won’t need the money for at least a year (or longer preferably).
The online broker you choose will also send you any applicable tax forms at the end of each year. I have found these to be quite simple to enter into TurboTax myself or take to H&R Block.
For beginners, don’t pay attention to the fancy financial terms such as “Bonds” “IPOs” or “Options Trading”. These terms are all broken down in plain English elsewhere, but honestly, it’s not necessary at this moment to understand them. We will be focusing on buying, holding, or selling. But do notice the up front warning signs inherent to any financial service that you are managing yourself. These state that this account:
- Is an Investment Product
- Is not FDIC Insured
- Has no Bank Guarantee
- May Lose Value
Naturally, we would expect to see this. So have a seat and get comfortable with a little uncertainty in your life. I’m with you!
3. Set Up Your Own “Watch List” of Stocks
This is kind of like your “Shopping Cart” of stocks. Understand what the business does and how the business makes money. Read the company profile on Yahoo Finance, take a look at how they are trending in terms of revenue, debt, and earnings per share.
You can make multiple watch lists to track groups of stocks you are interested in such as energy stocks, airlines, or tech stocks. You can set this up without spending a penny and most of the websites will show you the increase or decrease of the price per share since you added it to your watch list. So even if you weren’t ready to start investing, you could still see how you’d be doing if you invested at “X” date.
Speaking of mutual funds:
You’ll recall a “mutual fund” is a way of describing a pool of money from many investors (like you and I) collected by a financial institution and allocated to a specific set of investments such as stocks, bonds, or real estate. This is a great option to reduce the risk of being invested in a single company.
You can add a mutual fund to your watch list and invest in it similarly to a stock. You just might have a high initial investment requirement and there may be a small commission fee. If you have a 401(k) or similar at work, it is likely investing in a “target date” fund which selects mutual funds and changes over time based on when you may retire.
4. Choose a Stock (or Stocks) and Initiate a Buy Order
Usually you can make a purchase or sale immediately during market hours which are Monday through Friday 9:30am to 4pm EST, excluding US Holidays.
For the scope of this article, and for beginners in general, I will be focusing on Buy and Sell orders at regular Market Price.
“Market Price” means to buy or sell a security (fancy word for stock) at the prevailing (current) market price when the order is eligible for execution (at the next available time during business hours). This is the most general and widely used option and should be your focus at this time. You can enter a number of shares or enter a dollar value and have the website calculate how many shares you can buy. Either way, double check your order before clicking “Place Order“.
Placing an order while the stock market is not open will result in a message stating: “The market was closed when we received your order. It has been entered into our system and will be reviewed prior to market open on the next regular trading day. After market open, please check to make sure your order was accepted.” I do not recommend doing this as the price may fluctuate at the open of the next trading day. To avoid this, enter your order during market hours or see “Limit” below.
Additional and more advanced ways to buy and sell that you may see listed on your website (feel free to ignore these for now and skip to step #5):
Market on close to buy or sell a security as a market order as close as possible to the close of trading for that security on the day the order is entered.
Limit to buy a security at (or below) a specific price, or to sell a security at (or above) a specific price.
Stop on quote to buy or sell a security when its market price (ask price for buy orders and bid price for sell orders) reaches a specified stop price. When the security’s market price reaches the stop price, the order is triggered and turns into a market order.
Stop limit on quote to buy or sell a security when its market price (ask price for buy orders and bid price for sell orders) reaches a specified stop price. When the security’s market price reaches the stop price, the order is triggered and turns into a limit order.
Trailing stop $ to buy or sell a security when its market price reaches a trailing stop price. The trailing stop price is initially specified in terms of points (stop value $) above (for buy orders) or below (for sell orders) a security’s market price. The trailing stop price is automatically adjusted as the market fluctuates.
Trailing stop % to buy or sell a security when its market price reaches a trailing stop price. The trailing stop price is initially specified in terms of percentage (stop value %) above (for buy orders) or below (for sell orders) a security’s market price. The trailing stop price is automatically adjusted as the market fluctuates.
5. Set Yourself a Plan and Build Diversity Into Your Portfolio
If you can, I recommend selecting a small set of companies to start with. Do some research based on what interests you and split your initial investment across maybe 5 or 10 companies. Experts vary on the correct number of holdings a person should keep, but the main goal is to stay diversified. For example, don’t buy 10 different bank stocks.
For example, you could buy:
- One stock in a company that makes computers and phones.
- Another stock in an energy company.
- A third stock could be related to something you are passionate about or a hobby like video games.
- A fourth might be a stock that you think is undervalued in the current environment such as an airline or cruise line stock during the COVID-19 pandemic.
- Finally, maybe a financial company that operates in a country outside of your own.
This is how you stay diversified.
Now that transaction fees are a thing of the past, you can invest as little or as much as you want, but you should define a set schedule for yourself. Does that mean you’ll invest once per week on Friday? Maybe you’ll buy one share of each of your five companies every payday. Or maybe you’ll invest a lump sum once per quarter.
It doesn’t matter, but by sticking to a set schedule, you can dollar-cost average and avoid dumping all of your money into a stock and getting a bad price. It’s all related to your best, educated guess though so don’t think TOO much about it. Again, time in the market is better than timing the market.
If you’ve chosen a stock that pays dividends, they will likely be set to automatically reinvest in the stock you’ve chosen. If this is the case, you’ll get a notice once a quarter when the company pays out their dividend to their shareholders. This is a great way to start compounding your investment. See my example below:
All of that ends in the hardest step of all. Wait for your stock to appreciate. If you’ve done your research, give it time, and don’t check the stock price everyday. Don’t worry too much about headlines or “professional” opinions. For every bull you can find a bear.
You are now part-owner of this company, no matter how small. Just because someone offers you a little less tomorrow for the piece of the company you bought today doesn’t mean you should sell it to them. You believe in the company, the products they sell, and the people they employ.
- Select an Online Broker to Use
- Try to get a bonus offer for signing up or a referral from a friend
- Fund Your Account
- Don’t dip into your safety net just because you think you’ve found a great deal
- Set Up Your Own “Watch List” of Stocks
- Some brokerages have a feature to let you see how your stock has done from the day you added it to your watch list, play around with it!
- Choose a Stock (or Stocks) and Initiate a Buy Order
- Congratulations on your first purchase!
- Set Yourself a Plan and Build Diversity Into Your Portfolio
- Stay grounded and invest responsibly with a plan or goal in mind
The road to wealth is paved with patience (and ends with a pot of gold of course).
Best of luck!
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