Buying stocks: everything you need to know
Buying stocks has long been one of the easiest ways to enter the world of investing. Whether you have a sizable chunk of money set aside to invest or can afford a small amount per week, buying stocks is an accessible way of making your money work harder for you over the long term.
What are stocks?
Before you start buying stocks, it’s crucial to know the fundamentals of what it is you’re investing in. A stock – or equity – is a type of security representing a fractional ownership of its issuing corporation. A unit of stock is called a share. If you own a share of a corporation, you are entitled to a proportion of its assets and profits that equate to the stock you own. Corporations tend to issue stock to raise more funds for business operations.
Buying and selling stocks is generally undertaken on a stock exchange. The government regulates these exchanges to protect investors from fraud or other negligent practices.
What are the benefits of buying stocks?
Stocks are one of the most effective ways of growing your money over the long term.
All investments carry risk, and buying stocks is no different since the stock market is volatile. But there are different types of stocks, from high-risk, high-reward options like mini-bonds and venture capital to safer, lower-risk stocks like government and corporate bonds. As such, you can undertake an investment strategy that suits your attitude to risk.
Regardless of your risk tolerance, the benefits of buying stocks are numerous. You can build your wealth significantly over time, earn passive income and protect yourself against broader economic challenges like inflation and taxation.
According to The Motley Fool, despite the highs and lows of investing in stocks, $10,000 invested in the stock market 50 years ago would have grown to more than $380,000 today.
There are other benefits to opting for stock investments over other alternatives, such as real estate.
The liquidity of stocks means they are easy to buy and sell since they are usually traded publicly on a major stock exchange. So, compared to an investment like real estate, you can sell up easily and quickly if needed. Moreover, real estate requires a sizable portion of up-front capital. In contrast, you can buy stock for smaller amounts; many online brokers allow investors to purchase less than $100 worth of stock. It is, therefore, a highly accessible and liquid form of investment.
How do I start buying stocks?
Speaking with a financial advisor is a great way to gain key insight into how to proceed. They will cover the details below with you, catering to your risk tolerance and financial situation.
1. Selecting a broker
An easy way to start buying stocks is to opt for an online stockbroker. You can open an account and start buying stocks in a matter of minutes through some brokers; all you need to do is complete an application, verify your identity, and choose how you want to fund the account.
Things to consider when deciding on the right broker include trading fees and the minimum amount you’ll need in your account. Alternatively, you can opt for a full-service stockbroker or buy stock directly from a company; this is less common and more complex.
2. Research the stocks you want to buy
The stocks you want to buy will depend on your risk tolerance. But you’ll also want to invest in stocks of a company that you understand. Research is, therefore, key to establishing whether or not you’re making a solid investment.
Take a good look at a company’s balance sheet and annual report; you can then develop a rounded view of your potential investment.
3. Determine how many shares you want to buy
The beauty of buying stocks is that they are accessible. Starting small could be a wise move to get to know the process better. That said, the more you invest, the more you’re likely to get in return, so a serious analysis of your finances is important before you start buying stocks.
4. Place your trade
When you’re ready to place your trade, you can enter an order through your broker. In doing so, you’ll need to decide whether to place a market or limit order.
The former lets you make the transaction at the best current price, so you won’t have control over the price you pay. The latter enables you to set a transaction price, and the trade won’t be placed unless you get that price or better.
You can set a limit order to be valid over a lengthy period, though the broker you choose will likely have a set amount of time before it expires.
5. Manage your investment
Once you have bought your stock, you should keep track of the company’s earnings on a quarterly and annual basis.
If things are going well, you can allocate more money to your investment and grow your portfolio. While your stock will no doubt decrease at some point, you’ll need to make a call on whether you should sell up or buy more at a discount.
The bottom line
Starting with stock investment is simple, but succeeding requires careful planning and dedication. Only when you are confident from your research into a company and have analyzed your finances in depth should you buy stocks.
It’s also important to remember that the process is a long-term investment strategy. While there are varied gains you can make depending on the risk you take, if you’re buying stocks, you should be in it for the long game.
A financial advisor can help you with your financial planning. Get in touch today.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.