How to Buy Stocks for Beginners

Views 34KSep 26, 2024
how to buy stocks for beginners

Embark on your investment journey with confidence as we guide you through the steps to buying stocks. Whether you're a novice investor or seeking to refine your strategy, this comprehensive guide is tailored for you.

How to Start Trading Stocks

Starting in stock trading requires handling emotions such as market anxiety and enthusiasm for potential profits. New investors often grapple with psychological challenges, including fears of financial loss. Successfully navigating these emotions requires patience and a focus on long-term goals. Explore fundamental considerations for a solid foundation in stock trading.

Step 1: Opening a Brokerage Account

To initiate stock trading, the first step is securing a brokerage account. When selecting an online stock brokerage, evaluate two key factors:

Brokerage Offerings: Assess whether the firm provides all the necessary products and services. Some brokerages excel in offering educational resources for novice investors, while others grant access to stock research and analytical tools. Consider additional features like in-person guidance through branch offices, trading international stocks, or purchasing fractional shares.

User-Friendly Platform: Evaluate the ease of navigating the brokerage platform, especially if you intend to trade using a mobile device. Many major brokerages permit the use of simulated funds for a hands-on experience with their trading platforms. Explore various platforms to determine which one suits your preferences.

Most leading online brokerages, such as Charles Schwab, Fidelity and Moomoo, have eliminated commissions on online stock trades, reducing the financial factor in choosing a platform. However, it's crucial to note that certain investments, like mutual funds and options, may still entail commissions. Once you've made your brokerage choice, the subsequent step involves completing a new account application, typically a swift process requiring essential information such as a driver's license and Social Security number.

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Step 2: Deciding which stocks you want to buy

We won't extensively explore diverse methods for researching and selecting stocks. Nonetheless, the subsequent emphasis is on pinpointing the stocks you desire to acquire, and here are some essential factors to consider:

Adopt a Long-Term Approach: Embrace a buy-and-hold strategy by choosing stocks you intend to hold for an extended period. Avoid impulsive decisions based on short-term forecasts, and leave day trading to professionals.

Ensure Portfolio Diversification: Spread your investments across multiple stocks instead of concentrating on one or two. Even with a modest initial investment, diversifying your portfolio by acquiring shares from various companies is feasible with commission-free trading. Additionally, fractional share investing offered by many brokers enables you to invest a small amount in multiple companies.

Tips for Picking Stocks

   1. Investment Objectives:

       Clearly define goals and evaluate risk tolerance.

   2. Fundamental Scrutiny:

       Analyze company fundamentals, emphasizing financials and industry positioning.

   3. Stock Screeners:

       Use stock screeners to filter based on criteria like market cap and industry.

moomoo stock screener

   4. Technical Indicators:

       Familiarize with key indicators (moving averages, RSI) for informed decisions.

   5. Heatmaps for Trends:

       Utilize heatmaps to visually identify market trends and hotspots.

   6. Competitive Prioritization:

       Prioritize companies with sustainable advantages.

   7. Diversify Portfolio:

       Mitigate risk through diversified holdings.

   8. Stay Informed:

       Monitor market news and impactful events.

   9. Portfolio Review:

       Regularly align holdings with changing market conditions.

   10. Leverage Caution:

       Exercise caution with leverage for more effective risk management.

Step 3: Deciding how many shares to buy

A prudent approach is to commence with paper trading, utilizing a stock market simulator, to gain initial experience. Through paper trading, one can practice buying and selling stocks using simulated funds.

Alternatively, if ready for actual investments, starting with a minimal amount is advisable. Initiating with just a single share allows individuals to acquaint themselves with stock ownership dynamics and assess their ability to withstand market fluctuations with minimal stress. As proficiency in navigating the market grows, investors can gradually diversify their stock holdings.

New stock investors may also explore fractional shares, a recent offering from online brokers, enabling investment in a portion of a stock rather than the entire share. Additionally, many brokerages provide tools to convert dollar amounts into shares, facilitating investment planning for specific monetary goals.

moomoo stock screener

Step 4: Buying stocks using the right order type

Gaining expertise in stock purchasing requires comprehension of three important order types: market orders, limit orders, and stop orders.

A market order is executed immediately at the current market price, ensuring swift but potentially varying execution prices. It provides a prompt entry into the stock market, suitable for investors prioritizing speed over precise pricing. However, the trade-off is that the final execution price may differ from the expected purchase price.

A limit order allows you to set a specific price at which you want to buy, ensuring price control but potentially delaying execution. This order type is beneficial for investors who prioritize price precision and want to avoid paying more than a predetermined amount for a stock. However, there's a risk of the order not being executed if the stock doesn't reach the specified price. Understanding these distinctions empowers you to make more informed decisions tailored to your specific investment scenario.

A stop order, including stop-loss, stop-entry and trailing stop-loss orders, is a type of order that directs to buy or sell a security as soon as its price attains a predetermined level, i.e., the stop price; when the stop price is reached, this type of order turns into a market order.

Step 5: Placing the stock order with your brokerage

Placing a stock order with your brokerage involves several steps. Firstly, log in to your brokerage account and navigate to the trading platform. Choose the stock you want to buy or sell and select the order type—common types include market orders for immediate execution or limit orders to specify a price. Enter the quantity of shares you wish to trade.

Specify additional parameters like order duration (day order or good 'til canceled) and any relevant conditions. Review your order details and confirm. Keep an eye on transaction fees that may apply. After confirmation, monitor your order's execution status through the brokerage platform.

For a sell order, the process is similar, but you'll indicate the number of shares to sell. Always double-check order details before confirming to ensure accuracy. Familiarize yourself with your broker's platform, as specific steps may vary based on the brokerage's interface and features.

>> Don't need a broker? Learn How to Buy Stocks Online without A Broker

Step 6: Building and optimizing your portfolio

Building and optimizing a portfolio involves strategic planning and making adjustments as necessary. Start by defining your financial goals, risk tolerance, and investment horizon. Spread your investments across various asset classes, including stocks, bonds, and potentially alternative investments, based on your risk tolerance.

Conduct thorough research on individual securities and industries. Utilize tools like stock screeners to identify potential investments based on your criteria. Regularly review and rebalance your portfolio to ensure it aligns with your objectives and adapts to changing market conditions. Consider the impact of economic trends and global events on your investments.

Optimization includes assessing fees, taxes, and transaction costs. Minimize unnecessary expenses to enhance overall returns. Stay informed about market developments and adjust your portfolio accordingly. Periodically assess your risk-return profile and make adjustments as your financial situation evolves. Seek professional advice if needed, and remember that a well-constructed portfolio is a dynamic entity that requires periodic evaluation and optimization.

Step 7: Appraising when to sell stocks — and when not to

Considering when to sell stocks requires a thoughtful approach that takes into account both short-term fluctuations and long-term objectives. Consider liquidating a stock in the event of adverse changes in fundamentals, such as decreasing earnings or a shift in industry dynamics. Reevaluate if the stock reaches your profit target or if your investment thesis is no longer valid. Consider selling if the portfolio becomes too concentrated in a single stock or sector to mitigate risk effectively.

On the other hand, it may be wise to resist selling due to short-term market volatility unless it fundamentally impacts the company's prospects. Avoid making emotional decisions; instead, base them on well-defined criteria and a clear understanding of your investment goals. Regularly review your portfolio and consider professional advice to make informed decisions. Patience is often rewarded in investing, so staying focused on long-term objectives can be key to successful stock ownership.

Risks of investing in stocks

Understanding the risks of investing in stocks is crucial for informed decision-making. Market volatility can lead to short-term fluctuations, impacting stock prices. Economic downturns, industry-specific challenges, or poor company performance pose risks. Individual stocks may be subject to specific risks like management changes or competitive pressures. External factors such as geopolitical events and regulatory changes can influence markets. Investors should be aware of liquidity risks, where selling a stock may be challenging. Additionally, past performance is not indicative of future results, emphasizing the unpredictable nature of stock markets. Conduct thorough research and diversify to mitigate risks associated with investing in stocks.

FAQ About Stock Trading

1. Is It Possible to Buy and Sell Stocks Commission-free?

Certainly, the possibility of buying and selling stocks commission-free has become a reality with the advent of commission-free trading platforms.

2. Can I Trade Stocks Online Without a Traditional Broker?

Exploring avenues for purchasing stocks online without a conventional broker opens doors to alternative methods. Investors can leverage direct stock purchase plans (DSPPs) or dividend reinvestment plans (DRIPs) offered by some companies, allowing direct buying from the issuer. Additionally, online investment platforms provide user-friendly interfaces for independent stock purchases, offering flexibility and convenience in managing an investment portfolio. These alternative approaches empower individuals to engage in online stock trading without relying on a traditional broker, providing diverse options tailored to various preferences and investment styles.

3. Will I have to pay taxes on the profits?

Understanding the tax implications of stock trading is crucial. Profits from stock investments are generally subject to capital gains tax, but navigating this landscape involves strategic planning.

Consider tax-advantaged accounts like Individual Retirement Accounts (IRA) and Health Savings Accounts (HSA), which can help enhance your investment potential. Contributions to these accounts may be tax-deductible or grow tax-free, providing a shield against immediate tax liabilities. By strategically utilizing these accounts, investors can minimize taxes on profits, while learning to make more informed decisions that align with their financial goals and long-term wealth-building strategies.

4. How Do I Invest in Stocks Online? 

To invest in stocks online, you will want to follow these tips:

   1. Find an online brokerage that meets your needs

   2. Create an account, which will follow a similar process to opening a bank account.

   3. Transfer funds into the account.

   4. Select the stocks you would like to buy and make the purchases.

   5. Track your stocks online through the exchange platform.

5. How Do Stock Options Work? 

Stock options work differently than traditional stock purchases. A stock purchase involves buying a piece of the company. However, a stock option calls for you to make bets based on what you think a particular stock will do. You will purchase either a ‘put’ option or a ‘call’ option with stock options. The call option gives you the right, but not the obligation, to buy stock when it hits a certain price by a certain time. However, a put option gives you the right to sell a stock if it hits a certain price by a certain time. To succeed with stock options, you need to adeptly wager whether the stock will rise or fall, by how much, and within what time frame.

6. How Do 'puts' Work? 

A put will give you the option to sell a stock at a given price. For example, if you think that a stock will not perform well, you may buy a put option to have the chance to sell it and avoid too much loss or even profit from the stock's drop. For example, if you put a put option to sell stocks at $50 and then it drops to $40, your profit is $10, minus the premium paid to put the put option. A put option permits you to sell a stock at a particular price. Generally, you will buy a put option if you think the performance of a given stock will decrease.

7. How Do You Short a Stock? 

Borrowing a stock allows you to do something known as shorting a stock. Shorting a stock can be a complex and sophisticated investment strategy that allows you to make money off stocks that are falling in price. The process works like this.

    • Your market analysis tells you that a particular stock will likely fall short. 

    • Say you see a stock that will fall and is currently worth $20 a share. You borrow shares of the stock from a broker and sell them immediately at the current price. You borrow 50 shares from the broker at $20 a share and then sell them immediately at $20 a share for a total of $1000.

    • The price then drops if you predicted its movement correctly. Now the shares are worth only $5.

    • Using the $1000 you made from selling the stock, you buy all of the shares back at their current price of $5. This means you only need to spend $250 to buy back all the shares.

    • You return the borrowed shares to the broker, but you have now pocketed $750-- of course, subtracting any interest or commissions you owe for your trades.

    • Need to disclose the risks: However, obviously, if the stock rises in price, you will lose money.  Using the $1000 you made from selling the stock, if the stock price goes to $40 a share – when you buy the stock back, that 50 shares will cost you $2000 and you will effectively lose $1000. [BJ3] 

You can participate in this process by opening a margin account with your broker. You will have to make minimum deposits and demonstrate you have enough collateral. Your margin account will have to be approved by the broker. Keep in mind that since this is a loan, you have to consider factors such as interest on your loan. Also, the more money (aka「leverage」) that you have the higher your potential risk.

8. How do I buy stock after hours? 

To buy stocks after hours, you will need a brokerage platform that allows you to participate in the premarket or after-hours trading sessions. Futu makes this process easy for customers, with extended trading hours and multiple markets available for customers.

Since fewer people participate in the extended hours trading periods, you will see that stock prices often exhibit greater volatility during these periods; this means that limit orders are generally recommended. Once you have a brokerage account to help you trade after hours, you will place an order through ECN (electronic communications network), which will match your order with available stocks, similarly to how it works during traditional trading hours.

9. What Does It Mean to Buy the Dip? 

To buy the dip means that you think a stock is only experiencing a temporary dip and will recover. In this situation, the dip can be seen as a discount on the stock price, and you have the chance to profit as the stock recovers, and the price goes back up.

To buy the dip requires you to have a deep understanding of stock performance so that you can predict if the problem is only a temporary dip or an actual downturn. 

10. What is the 'Buying on Margin' Definition? 

'Buying on margin' means that you will make your purchase using the money you borrowed from your brokerage. To make this type of trade, you will have to have a margin account, and you will have to make a minimum investment specified by your brokerage. Once your account has been approved, your brokerage will allow you to borrow money to buy more stock than you would have otherwise been able to on your budget.

Like any loan, you will have to pay interest on the loans. You will want to make sure you fully understand the terms of your loan so that you know when you will owe interest on your loan. When you sell the stocks, the money you receive from the sale will go towards the loan's payment until you have fully paid it off. Then, any profits after that will go to your account. Please keep in mind that the use of margin may increase the risk of your portfolio.  Only invest in margin after carefully reading the margin risk disclosure documents provided to you by your firm.  Also – keep in mind the following risks in a margin accounts:

    • You can lose more funds than you deposit in the margin account. 

    • The Firm can force the sale of securities in your account.

    • The firm can sell your securities without contacting you.

    • You are not entitled to an extension of time on a margin call.

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11. What is a buy-stop order? 

A buy-stop order is an order that will not start getting filled until the stock reaches your predesignated price. In other words, if you want to buy 50 shares of a stock when the price reaches $50, then you may have a buy-stop order that specifies the purchase of 50 shares when the price reaches $50. The rest will not see this type of order of the market until the price hits your target and gets triggered.

Unlike a limit order, which specifies that you will only buy the stock at a specific price, a stop order essentially has an ‘on’ switch. Once the stock crosses your line, the order turns into a market order and will be fully filled. In other words, once it is triggered, it will keep getting filled even if the price of the stock continues to change.

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12. Can you buy stocks on the weekend? 

Investors who want to trade stocks on the weekends will find that they have a few different options available to you. Your first option is to simply place orders for trades you want to make over the weekend and know that the orders will get filled when the market reopens at the beginning of the week.

Your next option would be to trade in other markets. You have the option of trading internationally using other stock markets that, thanks to time differences, are open at different times. For example, the Hong Kong stock market is about 12 hours ahead of the United States East Coast. This means that on Sunday evening in the U.S., the market will be opening in Hong Kong.

Finally, you can also consider the markets specifically in the Middle East, which operate on a calendar with Friday as the start of the week and runs right through the weekend.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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