Learning how to buy stocks is increasingly growing in popularity.
The Gallup organization conducts an annual poll asking Americans about stock ownership. It has surveyed U.S. adults 18 and older living in all 50 states and the District of Columbia since 1998.
The most recent poll was conducted by telephone between April 3 and April 25, 2023. It found that of approximately 1,013 people surveyed, 61% had money invested in the stock market, the highest level since 2008.
In terms of age groups, 45% of those between the ages of 18 and 34 invested in the stock market, followed by 63% for those over 55. The highest rate of ownership was 71% for those between the ages of 35 and 54, some of the highest-earning years in an adult's life.
Fortunately, the advent of fractional investing and exchange-traded funds (ETFs) has made it easier than ever to invest in stocks. Remember that time in the market – as opposed to timing the market – has the most significant influence on your long-term returns. The younger you start, the more likely you'll reach your long-term goals.
No matter your situation, here are four critical steps to take when learning how to buy stocks.
How to buy stocks: Determine your investment plan
While it's great to think about finding tenbaggers (stocks that gain 10 times your initial investment) for your portfolio, it should wait until you've thought about the bigger picture.
It helps first to identify the long-term goals for your investing plan, the dollars required to achieve these goals and the risk you're willing to take in pursuit of them.
Everyone's plan will be different.
There are many ways to set investment goals. However, dividing them into short-term, medium-term, and long-term periods is the simplest.
Short-term goals could be anything you'd like to achieve within the next year; medium-term goals could be those to achieve over the next five years; and long-term goals are those farther down the road, say retirement, at age 60, 65, or whatever suits you.
For this article on how to buy stocks, we will focus on the long-term goals of a 25-year-old looking to retire at 65, providing approximately 40 years of earned income.
According to a 2023 Charles Schwab survey of 1,000 people with 401(k) plans, the respondents said they would need $1.8 million to retire. Based on 40 years to get to this figure and an average annual return of 9.9% (dividends reinvested) for the S&P 500 over the past 30 years, you would need approximately $41,244.
A new grad is unlikely to have this initial amount. However, if you invested $1,000 today and made annual contributions of $3,750 over the next 40 years, time and compounding would allow you to get close to your $1.8 million goal.
With your goals in hand, you're nearly ready to buy stocks.
How to buy stocks: Find a broker
To buy stocks, you need to open a stock market account and place an order through a stockbroker. These institutions are regulated by FINRA (Financial Industry Regulatory Authority), a government-authorized not-for-profit organization whose sole role is to ensure that the broker-dealer industry operates fairly and honestly.
There are generally two types of stockbrokers: Full-service investment advisers and discount/online brokers.
Full-service investment advisers are professionally licensed to provide investment advice on behalf of the stock brokerage they work for. They either charge a percentage of the assets they manage or commissions for trades made to buy or sell stocks and other investment products.
The latter uses online technology to buy and sell stocks and other products on your behalf. They generally provide these trading services at low or even zero-fee commissions.
Four of the best online brokers for investors 35 and under, according to Investor's Business Daily and its polling partner TechnoMetrica Market Intelligence, are Fidelity, Robinhood, Charles Schwab and E-Trade.
How to buy stocks: Select and research stocks to buy
For many investors, ETFs provide a low-cost and easy way to invest in stocks across themes, regions, company sizes, investment styles, etc.
Ironically, one of the best ways to find stocks to buy is to look through the holdings of ETFs.
For example, if you believe free cash flow generation is an essential attribute for stocks in your portfolio, you'll want to check out the Pacer US Cash Cows 100 ETF (COWZ). The fund screens the Russell 1000 index for companies with the biggest free cash flow yields. Names in the top 10 currently include homebuilder Lennar (LEN) and healthcare stock CVS Health (CVS).
With almost 6,000 stocks to buy listed on the New York Stock Exchange and Nasdaq, it is critical to do your research and choose stocks that align with your investing goals.
How to buy stocks: Place the order
By now, you've done all the work and preparation necessary to own stocks. It's time to buy some.
There are three order types: Market, limit and stop. Each of these orders is used in a specific situation.
Investors use a market order to ensure they buy a particular stock at a specific time without regard to price. The downside is that you may pay more than you expected in a fast-moving bull market or, if you're selling, get far less than expected in a fast-moving bear market.
A limit order restricts the price you're willing to pay on a buy and the price you're ready to accept on a sale. So, for example, if you put in a limit order to buy Stock A for $30, it could be filled at $29.95, but not $30.05.
The inverse is true for selling a stock. You put in a limit order to sell Stock B for $30; it could be filled at $30.05, but not $29.95. Investors use limit trades to ensure price certainty for buy or sell transactions.
A stop order is used to buy or sell a stock at the market price once it hits your specified price. So, in the above example, if Stock B is trading at $30, and you place a stop order to buy at $32, once it hits $32, a market order is placed to buy.
Conversely, if you place a stop order to sell at $28, and it's trading at $30, a market order is placed as soon as it falls to $28. Investors use stop orders to ensure the price doesn't get away from them on the upside or downside.
With this in mind, you're now ready to start investing in the stock market.
