Owning a piece of the stock market can be an exciting endeavor. After all, with the purchase of stock shares, an investor does technically become part owner of a business.
When someone buys a share of stock, they are essentially buying a piece of that company. The percentage of ownership may be small, but it’s ownership, nevertheless.
This is why stocks are also referred to as equities. Investors own equity in the companies for which they own stocks. A company’s stock is partitioned into shares, each of which is a unit of stock.
Each company decides how many shares of stock to make available for public purchase. (This is why companies that offer stock are also referred to as publicly-traded companies.)
Mutual funds and exchange-traded funds are also subdivided into shares. Whether with stocks or funds, investors will have to make a decision about how many shares to buy.
Related: Is there such a thing as a safe investment?
How to Buy Shares of a Company
Between opening an account, researching an investment and placing a trade, buying those first shares can feel tricky. But with some practice, it’s possible to learn the ropes in no time.
Many first-time investors might wonder, “How do I buy shares of an investment?” Here are step-by-step instructions for becoming an investor, including what to know about how to buy shares in a company.
1. Research and Think About What You Want to Buy
In the journey that is learning how to buy shares, what better place to start than with a little research? Before making any investment decisions, like opening and funding accounts, it can make sense first to sit down, pour a cup of hot coffee, and dig into the options. Mapping out a plan for what shares to buy is a great initial step.
To begin, investors may want to decide whether they’re interested in buying shares of individual stocks or shares of a fund, such as an exchange-traded fund (ETF).
A stock represents a share of ownership in a publicly-traded company. Many companies offer both common and preferred stock, although most new investors are interested in common stocks. Common stock provides its shareholders with voting rights and access to dividend payments.
Stocks can provide a return on investment in two ways. The first is through price appreciation, which is the value of a stock increasing over time. The second is through dividend payments to shareholders, if applicable.
Although this is an oversimplification, the idea is that as the whole company grows, so does investors’ piece of the pie. Ideally, shareholders are able to reap the benefit of a company’s wealth-building over time.
It is very difficult to predict which stocks will be successful because it’s hard to predict which businesses will be profitable in the future. It’s common for companies not to match investor expectations. Due to the unpredictability of the future, individual stock returns can be particularly volatile.
But buying individual stocks also provides a chance at higher rewards if investors are able to pick shares that are exceptional performers. That’s why individual stocks are “high risk, high reward.”
A fund, whether an ETF or a mutual fund, can be thought of as a bundle of investments. Oftentimes, these investments are stocks, but they could also be bonds, real estate holdings or some combination of all.
For example, it’s possible to buy a mutual fund or ETF that holds the stocks of the 500 “leading” companies in the US (or even thousands of stocks across the globe). An important thing to understand is that investing in a fund is an investment in that fund’s underlying holdings. If a fund is invested in 500 stocks, for example, the fund is absolutely an investment in the stock market.
An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered to be less risky than owning an individual stock. Hopefully, the reasoning here is somewhat intuitive: It is much more likely that a single company fails than the entire economy.
That said, owning an equity ETF or mutual fund is still certainly considered to be risky, as investors are still very much involved in the capricious stock market. Investors must be prepared for the occasional ride of stock market volatility, including the likelihood of ups and downs in value.
That said, broad, diversified mutual funds and ETFs can provide an easy way to gain exposure to the stock market (and other markets as well). In investing, diversification means buying lots of different investments as protection in the event that one fails. With the purchase of just one share of some funds, it may be possible to invest across the entire U.S. or even the world in a diversified way.
Depending on where investors choose to open their accounts, they may have access to ETFs or mutual funds or both.
2. Determine What Type of Account to Open
One big decision here is whether to open an account that is specific for retirement or a general investing account.
Sometimes, general investing accounts are called brokerage accounts. A brokerage account is simply a place where people can buy and sell investments (think of the word “stockbroker”). But again, this term may be used as a catchall for general investment accounts.
Investment and brokerage accounts can be used for any (legal) purpose, and there are no limitations for use (unlike with retirement accounts).
Retirement accounts can potentially also be opened as brokerage accounts if opened at a brokerage bank. But in a way, retirement accounts stand separate from regular brokerage or investment accounts since retirement accounts receive special tax treatment.
This unique tax treatment is why money saved and invested for the long-term is kept separate from money that isn’t. It’s also why so many rules surround the use of retirement account, such as contribution limits and income limits. The IRS determines the rules of use around retirement accounts.
To keep it simple, investors may want to open a non-retirement brokerage or investment account, especially if they’re already covered by a retirement plan through work.
For a retirement account, investors could open a Roth IRA, Traditional IRA, a SEP IRA or Solo 401k (if self-employed). If investors opt to go the retirement route, they may also want to check with a certified tax professional to be sure that they qualify.
3. Decide Where to Open an Account
When it comes to deciding where to open an account, new investors have plenty of options.
Before diving into options, it’s helpful to remember that minimizing fees is the name of the game. Why? When calculating potential returns on investment, account holders may want to subtract any investing-related fees from potential investment earnings. Big fees can mean that investments have to work that much harder just to break even.
One option is to open an account at a low-cost brokerage. Depending on the firm, there may be account and trading fees (although the lowest cost brokerage have largely eliminated these in order to be competitive with the new financial tech companies).
Another popular option is to use an online trading platform. The third option for buying shares is to use a full-service brokerage firm. These firms tend to offer expanded services, such as a designated advisor, broker or wealth management. Naturally, these services tend to come with associated costs.
Therefore, a full-service brokerage might not be right for an investor who wants to buy just their first few shares.
Once an investor has made a decision, the share-buying process can be relatively seamless. Most accounts can be opened entirely online.
During the application process, investors will need to provide information such as social security numbers, dates of birth and addresses. Additionally, it may be required for investors to answer some questions about their current financial situation.
4. Fund Your Account With Cash
A good next step in buying shares is to fund the account with cash.
Depending on the institution, investors may be able to set up a link with an existing checking or savings account while they fill out the account application. It can be helpful to be prepared with the account and routing number for the bank that will feed funds into the new investment account.
If the financial institution does not offer this option upfront, there’s no need to worry. Generally, an investor can simply log back into their account and look for instructions on how to fund the account. For example, there may be a section called “transfer from another account” that allows users to hook up an external bank account via an electronic link.
Setting up an electronic transfer with a current bank account will likely be the fastest way to fund the account. If an investor is unable to set up an EFT or other automatic link to their checking account, it may be possible to mail a physical check directly to the investment institution.
One extra funding option is to sign up for an automated monthly transfer. In this way, money is invested regularly (without the need to remember to do so), which can be a healthy financial habit.
It may take a few days for the cash to arrive in its new location.
5. Place a Trade
When first learning how to buy shares, this part may feel unfamiliar, but it will only get easier with practice.
Before diving in, many new investors prefer to identify the ticker symbol of the shares they’d like to buy. A ticker is the shorthand symbol used to identify an investment. Tickers are a combination of letters, usually in upper case. For example, HOG is the ticker symbol for Harley Davidson Motorcycles stock. Cute, huh?
Assuming an investor is logged into the new account (and it’s already funded with cash), it’s possible then to navigate to the area of the dashboard that says either buy, sell or trade. Once there, the investment platform gives users a screen that allows them to place an order. Here, investors can indicate what they would like to buy and specify how many shares.
If buying a stock or an ETF, investors also need to indicate the order type. Both stocks and ETFs trade on an exchange, like the New York Stock Exchange or the NASDAQ. On these exchanges, prices fluctuate throughout the day. Mutual funds do not trade on an open exchange, and their value is calculated once per day.
There are many different types of orders. To get the hang of during that first share purchase, new investors may want to stick to the basics: either a market order or a limit order.
A market order focuses on speed. Said another way, the order will go through as soon as possible. The order can fill quickly, but it may not be instantaneous. Therefore, the price could change slightly from the original quote. If an investor places a market order, they may want to make sure that to have a slight cash cushion to protect from any erratic changes in price.
If placing a market order while the market is closed, the order is typically filled at the market’s open at whatever the prevailing price per share at that time.
A limit order, however, focuses on pricing precision. With a limit order, investors name the parameters for the order. For example, an investor could say that they only want to purchase a stock if it falls below $70 per share. Therefore, the order is placed if and only if the stock falls below $70 per share.
Therefore, it is possible that a limit order may not get filled (if it doesn’t reach the investor’s pre-selected price parameters). A limit order may be more appealing to a trader, while a long-term investor may gravitate toward a market order. The benefit of a market order is that it allows an investor to get started right away.
Another step is to review during this process is the actual share order. Once the trade is then executed, voila: The investor now officially owns the share (or shares).
Going from learning how do I buy shares to being a bona fide investment pro takes time. There’s lots to learn along this financial journey. But if the end goal is building up one’s wealth, then the learning curve can be well worth the mental investment.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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