For the beginning investor, getting into the complex world of stocks is intimidating. Getting to know all the important terms, researching which stocks are viable investments, then purchasing them can send anyone scampering away.
In this guide, InvestmentNews provides insight to anyone interested in putting together their first collection of stocks, or portfolio. Whether you are a beginning investor, recent graduate, or aspiring financial advisor, this guide can help you buy stocks.
Apart from how to buy stocks for beginners, we’ll cover these topics:
Investing in stocks is a complex process. It calls for figuring out your financial goals, considering your time horizon, and even your age. These factors heavily influence what’s known as your risk appetite or risk tolerance.
Before investing in any asset, stocks included, it’s important for you to know yourself, specifically your risk appetite, first. The most common types of risk appetite or risk tolerance are:
| Risk Tolerance | Investment Knowledge | Approach to risk of loss | Investor’s Features |
| Aggressive | High | Little to no fear | Can have a long time horizon |
| Moderate | Moderate | Moderately concerned | Uses balanced strategy |
| Conservative | Varies | Risk-averse | Retired or soon to retire |
Risk tolerance can be influenced by factors like the investor’s age, financial goals, and their time horizon for their financial goals. However, a conservative risk tolerance does not immediately mean that you are an investor who’s retired or advanced in age.
It’s also possible for a young investor to adopt a moderate or even a conservative risk tolerance due to their budget, time horizon, and financial goals. An older investor can adopt a moderate or aggressive approach, but due to market volatility, this is not advisable.
Moderate level of risk tolerance is often marked by adopting a balanced strategy in asset allocation. The moderate investor puts their money in a portfolio composed of 60% stock, 40% less risky investments. It’s not unusual for some investors with moderate risk appetite to choose a 50-50 asset split. The less risky investments can include high-yield savings accounts, certificates of deposit and other similar assets.
When it comes to investments, going at it blindly and adopting a fly-by-the-seat-of-your-pants strategy (if you can call it that) is never a good idea. You will surely wipe out your investment account and lose your appetite for investing in stocks.
To invest in stocks or any asset, do some research and come up with a plan. That starts with knowing your investment goals, risk tolerance, budget, and time horizon.
There are three types of investment goals, classified according to their time horizon:
1. Short-Term – these are often lifestyle-enhancing goals and have a short time horizon, usually three years or less. Examples are taking a trip or buying a new car.
2. Medium-Term – goals that are less of a lifestyle enhancement and have a time horizon of three to five years. This can be a more serious investment like establishing a college fund or buying property to generate rental income.
3. Long-Term – includes goals that can have lasting effects on an investor’s life. The time horizon can be at least five years and beyond. Goals that fall under this category can include retirement planning or what some people nowadays like to call F.I.R.E. (Financially Independent, Retire Early).
Once you have a clearer idea of your financial goals, time horizon and which stocks you want to invest in, then you can go through the process of buying stocks. Here are the steps involved:
Start with opening a brokerage account at a reputable financial institution. While this is a tried-and-tested way of buying stocks online, there are other options:
If you’re set on using an online brokerage, you can choose from some of the best, including:
Opening an online brokerage account for stock trading is a straightforward process, as most brokerages give clear online instructions. It only takes about 15 minutes to set up and fund your account.
From the online brokerages listed above, it may be difficult to decide which one to sign up with. When choosing the right online brokerage, a couple of pointers:
Some brokerages can offer these kinds of products or services:
A good way to choose the brokerage that’s right for you is based on having the right mix of products and services that works for your needs.
Some brokerage firms have excellent, user-friendly trading apps that are easy to use and navigate. This is important, especially if you plan to do most of your transactions with a mobile device like your smartphone or digital tablet.
Some online brokerages let you try their trading platforms before you sign up, so try them out first before you decide on a specific brokerage.
Complete your account once you’ve chosen a brokerage. You will have to provide some ID to finalize your account, so have your driver’s license and Social Security Number ready.
You will also have to give bank account information to fund your brokerage account, usually a savings or checking account.
You have the option to open an IRA account or standard brokerage account. The brokerage may also ask if you’d like to get their “margin privilege”. This means that you can buy stocks with money borrowed from the brokerage. While this may not sound like a good idea for beginning investors, having a margin privilege offers some benefits like:
This involves a lot of time and research on individual stocks. For this article, we suggest a simplified version to get you started. Let your choice of stocks be guided by these points:
To get a clearer picture of how many shares you can buy on the stock market, you must first decide on how much money you want to spend. You can calculate this simply by dividing the amount you want to invest by the stock’s current price. You can find a specific stock price on your brokerage’s platform by searching for the company’s name or ticker symbol.
For example, if you wanted to buy shares in an S&P 500-listed company like Apple Inc. (ticker symbol: AAPL), its share price is at around $189 per share. How many shares would you get if you invested $1,000? Dividing $1,000 by $189, we get around 5.3 shares of Apple stock.
When buying shares of stock, there are two different types of orders:
To complete the stock order, use your online brokerage’s platform and fill in the appropriate form in their ordering section. You will be asked for the stock ticker or company name, and whether you wish to buy or sell shares of stocks. The platform should also ask for the dollar amount or exact number of shares you’re buying.
Your stock purchase should be completed in mere seconds if you make a market order. The newly purchased stock should appear in your portfolio.
The final step is to build and balance your portfolio. Make it as diversified as your budget, investment goals and strategy will allow.
Here’s a short but interesting video on the dynamics of the stock market. As a beginner to stocks, it’s usually wiser to try and pick the right stocks and wait – this is the “buy-and-hold" strategy. The video also explains a bit about how stocks’ prices are determined:
As you begin your stock investment journey, here are some common mistakes to avoid:
Avoid following the herd and investing in the same stocks as they do. Before you invest, and that goes for any asset, do your own research. See if the company is a viable business. In most cases, you can see their annual reports and balance sheet online.
Financial advisers are there for a reason. Don’t hesitate to reach out to one and ask about the stock market. Later, when you gain more experience and invest more, consider hiring a Registered Investment Advisor.
Investing at the start of trading day then making a huge profit when trading closes only happens in the movies. You are more likely to lose all your investment money that way. Not even Warren Buffett became a billionaire overnight – it took two decades for him, so it could take as much time for you. Invest and be patient.
Warren Buffett warns against investing in companies that engage in businesses you don’t understand or know little about. This sort of “horse-sense” also applies to stocks.
If you looked at Buffett’s portfolio of stocks that can provide hefty earnings per share, you’d see companies that offer everyday products. He has stock in beverage and food companies like See’s Candies and Coca-Cola. He invested in Apple, Bank of America, and Chevron – all easily identifiable and researchable companies and brands. Invest only in the stock of companies whose products you can get to know and understand.
Investing in stocks can be overwhelming, but it doesn’t have to be that way all the time. Even beginning investors like you can learn the ropes with some time, effort, and above all, patience. Do your due diligence and research on companies and their stock performance. And don’t give in to emotions.
Start with a realistic investment strategy that takes your budget, time horizon, and risk appetite into account. Sign up with a good brokerage firm, buy decent stocks and wait. While it does sound easy in theory, it can be challenging in practice. Just be patient and keep going.
As you start your investment journey in stocks, what strategies will you implement? Don’t forget, there’s a wealth of investment advice for you right here on InvestmentNews.
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