If you are new to investing and want to buy stocks and begin building a portfolio, there are a few things you need to get started. Before you even place a trade, you must educate yourself on how the market works. Start reading financial websites or the business section of your paper to get an understanding of the stock market. There is no limit to the amount of information a new investor can learn about investing.
Once you have studied up on the stock trading basics, you will first need to find a broker to place your trades. There are plenty of different levels of service offered between brokers. Since there is a lot of competition in this industry, there are advantages for investors looking for the best fit.
Selecting the Right Broker
One of the first steps you need to take to buy stocks is finding a broker that fits your trading style. There are several different types of stock brokers to pick from, each having advantages and disadvantages. Some offer lower commissions on trades while others provide better trading tools and advice.
Here are 3 different types of brokers that investors can pick from.
- Online Brokers – Most online only stock brokers offer incredibly low commissions, sometimes below $5 per trade. If you tend to make a lot of trades (i.e. day trader), then you may want to consider this option as your broker. The downside of online brokers is the lack of service and advice that is offered to its clients. Just remember that there is a reason why you are getting low commission trades.
- Discount Brokers – Discount brokers offer a mix of lower commissions (like online brokers) and added service (like full service brokers). Commissions are generally a little higher than the online brokers but less than that of full service brokers. The tools and research is provided to clients but usually not through an actual broker. Instead, the information is available online through a brokerage account.
- Full Service Brokers – A full service broker will provide the most face to face time with an investor and offer the most advice. Brokers will provide stock tips and ideas for their clients that are supported by research. They will help to track an investors stock picks and will contact you when they think it is time to buy, sell, or add to an existing position. These types of brokers offer the best customer service but charge the highest fees.
There may be situations where an investor may want more than one broker to serve different purposes. An options trader, for example may want to have an online brokerage account to place all of their put and call trades. The low commissions will help save on the total costs. At the same time, that trader may want to have a full service broker available to manage their long term stock portfolio.
As technology and the internet continue to grow, most brokerage firms are starting to fall into the discount broker category. This seems to be the best of both worlds as they can offer reasonable commission prices along with important research for their clients.
Here are a couple well known brokers and the type of service they offer.
- Merrill Lynch – Full Service
- Fidelity – Discount
- Trade King – Online
Placing Your First Order
Once you have found the right broker, and have a decent understanding of how the market works, you can place your first trade. Most brokers require a minimum deposit in order to open up an account. You can use some or all of these funds to pay for your first stock purchase.
Regardless what type of broker you decide to use, you will be asked several questions when you decide to buy stocks. Here are a few pieces of information you will need to provide as you place the order.
- Ticker Symbol – The unique id used to identify a stock. If you don’t know the ticker symbol of the company you want to buy, ask your broker or search for it on any financial website. An example of a ticker symbol would be JNJ, which represents the company Johnson & Johnson.
- Action – The two most common actions you will take when placing a trade is buy or sell. There are a few other options like buy to cover and sell short that are used by more experienced traders.
- Quantity – The quantity represents the number of shares you plan to buy.
- Order Type – Traders can buy stocks using a market order, which tells the broker to buy the quantity of shares of the ticker symbol at the current price. These orders almost always get filled immediately and usually have lower commission charges. A limit order on the other hand allows you to set a price at which you want to buy the stock at. If the current share price drops below this level, the trade will be executed.
- Time Force – When placing a limit order, you may choose to keep it open until you decide to cancel it. This is commonly referred to as Good Till Canceled. If you want to buy a stock at a certain level but don’t want to place a new order every day, this option will keep it open indefinitely. The other option is to place a day order, which will close it at the end of the trading day if it is not filled. There are also a few other more complex time force options used by more experienced investors.
- Cash or Margin – Depending on how your account is setup, you will be asked if you want to fund the trade from cash or on margin.
Final Thoughts
Starting to buy stocks is really not all that difficult. Once you learn a little about how the stock market works, you really only need to find a stock broker that can place your trades. Remember that to open most accounts, you will need to make an initial deposit which can eventually be used to make your first stock purchase.
There are very few steps required to buy stocks for the first time. Once you have a broker lined up and money to fund the account, you have the power to begin investing in the stock market.
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