How to Buy Stocks

Looking to take the plunge and buy some stocks, but unsure where to start? This definitive guide will talk you through every step of the way and provide you with an understanding of what stocks actually are, the different ways of owning them, how to buy stocks US and where to buy and sell them. It will also explain trading concepts, such as time frames, and a host of other useful information. Read on and learn how to trade like a pro.

Also Consider: Best stocks and shares to buy now

Top trading platforms to buy US stocks in 2023

Below is my list of the best trading platform providers to buy stocks for US investors.

Useful information about buying stocks

Here I hope to answer the most pressing questions around buying and investing in stocks.

What is stock?

The term “stock” is a general, generic term, that is used to describe a slice of ownership of one or more companies.

What is a share?

A share is a more specific term, a share is a unit of measurement of an ownership interest in a specific company.

What are stocks and shares?

Stock consists of individual shares, which are the smallest denomination of a specific company’s stock. In its simplest form, stock represents a non-specific holding in a company or entity.

Shares are the specific amount a person holds.

So, a person may hold one share in a company and be a stockholder, and another individual may hold 2,000 shares in the same company and also be a stockholder.

Shares increase and decrease in value. However, investors like yourself will purchase stock in the hope that the continued success of the company will drive the value of these shares up. When this happens, stockholders may decide to sell some, or all, of their stock in the company and by doing so make a tidy profit from their investment.

Want to know how to buy stocks?

Happily, the emergence of online brokerage and trading platforms has made buying stocks accessible to everyone. These online platforms list the shares of companies that are listed on a stock exchange. The main exchange in the US, and indeed the most important worldwide, is the famous New York Stock Exchange (NYSE). Listed there you will find shares of all the major companies, as well as many iconic household brands.

Selecting which shares to buy, aka making an informed decision, is complex. In order to make a smart investment you will have to do some research on the company, as well as its current financials. Many share dealing platforms offer access to research on the companies they have listed to help you make informed decisions, something I touch upon in my review of brokerage platforms. In any case, you should always remember that past performance and reputation are no guarantee of future success. Remember Kodak? If yes, I suspect you are over 30. If no, exactly!

Brokerage platforms are the cheapest way of becoming a stockholder and buying shares. That said, there is no such thing as a free lunch, so before you open an account and start trading, make sure you are aware of the platforms’ costs associated with buying and selling shares. It pays to look around and see what is available. For example, most platforms will charge you a trading fee every time you make a transaction. However, a number of brokerage providers charge nothing for trades on their platforms.

Are all companies listed on a stock exchange?

No. For a company to be listed on a stock exchange, it must have first gone through an Initial Public Offering or IPO. This is the process by which a company first offers to sell company stock to the general public and institutional investors. At this point, the company has yet to list its shares on the stock market. However, they can be purchased through certain providers and will often be available at a discounted price. The hope for investors is that shares purchased during an IPO will increase in value on their first day of trading. This can be a risky strategy as their value may also fall, however, it should be noted that this rarely happens as the reason for a company going public and going through the difficult process of an IPO is due to the belief it will attract investors and be able to undertake further growth.

During the IPO you will be purchasing shares directly from the company in question before retail investors have the opportunity to buy and sell shares among themselves. Once the IPO is completed, the company’s shares will be listed on the stock market and will be available to buy and sell.

Find out more about how to trade IPOs in our Guide to Trading IPOs in the US.

What are the two ways of owning stock?

There are two main ways of owning stock, namely:

1. Owning stock as an individual
2. Owning stock via a fund. In a fund, individuals combine funds in order to invest as a group. This helps to reduce risk exposure.

What are the advantages of investing in a fund?

Investing in a fund is popular with investors of all stripes as it’s a great way for smaller investors to pool their resources and own shares in more companies, aka diversifying their holdings. All successful investors have a diversified stock portfolio as this way they avoid putting all their eggs in one basket. If one sector experiences a sudden downturn and, as a result, the share price falls, a diversified portfolio will not be as adversely impacted as the stock in other sectors will help soften the blow. Investing in a fund also comes with a host of other useful advantages, namely;

Professional Portfolio Management

A fund will usually come with an annual management fee, something you should factor into your calculations when deciding on a fund. This management fee covers the costs associated with the running of the fund by a professional fund manager. The fund manager is responsible for selecting what stocks the fund will buy into and what stocks it will sell, and when. This is a demanding role, but successful fund managers read the markets and help ensure strong returns for fund investors.

Reinvesting Dividends

Any dividends earned by the funds can be used by your fund manager to purchase additional shares in order to help the fund grow.

Mitigating Risk

Your fund manager will ensure that the fund is diversified and proofed against possible sector/industry shocks, in order to ensure a diverse portfolio that also provides robust returns for investors. Many funds will own in the region of 1,000 or more individual stocks across a varying range of securities.

How long should you invest for?

The value of shares can fluctuate: one day a company stock can be soaring high and the next it’s in free fall. These sorts of drastic movements are possible and often cause investors to make panicked decisions. It’s difficult to watch the value of your stock fall and do nothing, especially if other investors are hurriedly selling off their stakes.

However, if you do sell off your stock once its value starts to fall then you are, simply speaking, locking in your loss. If you decide to play the stock market and be an investor, you should always remember that the value of a company share is a changeable thing, and short-term fluctuations come with the territory. That’s why you should not look at short-term trends but remember that in the long run, the value of a company’s stock usually goes up. Therefore, a trader should seek to avoid market sentiment and refrain from selling all their holdings as soon as they drop in price.

Holding investments over the long term is by far the best way to mitigate risk and gives you time to ride out any short-term difficulties in the marketplace. Therefore, professionals in the financial sector will almost always recommend that you plan to hold your investments for at least five years before you attempt to sell them. This also provides scope for your investments to compound and grow, earning you better returns.

If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.

Warren Buffett

How many shares should you hold?

We have already covered the importance of diversifying your portfolio in order to mitigate your exposure to risk. Diversifying your portfolio is done by buying different stocks in different sectors and different geographies. This helps ensure that in case of a crash in one area of the stock market, the rest of your portfolio is able to weather out the storm and carry you over.

So, you may be asking what’s the magic number? The real answer is that it isn’t as straightforward as that. Reliable blue-chip companies will present much less risk to your portfolio and therefore you won’t need as many shares as you would if you were buying much riskier startup shares.

It is, of course, possible to over-diversify, at which point it can become impossible to keep track of all your shares and you will risk spreading yourself too thin. Always remember that you need to know what is going in and you should be in the loop for any news relating to companies that you own stock in. This way, you can anticipate possible developments within the company and by extension forecast, to a degree, the likely share price movement.

What sort of account should you invest into?

Your first $20,500 should always be invested into your 401(k) in order to avoid any capital gains tax on the returns you make from your investments. 401(k) plans are offered by a majority of investment platforms, however, there are usually associated costs and it’s worth taking the time to identify the best 401(k) and retirement plan for your specific circumstances.

For more information on 401(k) as well as our best-in-class recommendations, please refer to our Best 401(k).

The annual limit for depositing into a 401(k) is currently $20,500, so anything over and you should be thinking about investing in an individual retirement account (IRA). Most online trading platforms will also provide an IRA for this reason, and it stands to reason that you would be best served having both accounts with the same provider.

How do you make money from buying shares?

There are two main sources of revenue that can be made from buying stock. The first of these is when you buy a share which then goes up in value. Once you have sold that share, you have locked in your profit.

The other way to make money from shares is when buying the best stocks that pay dividends. Dividends occur when a company makes a profit and pays some of that profit to its shareholders. Some pay dividends on a regular basis and other companies will make one-off payments. The IRS considers dividends as an income and as such, they are subject to taxation, even if you fully reinvest the entirety of your dividend. The exact dividend tax rate depends on what kind of dividends you have: non-qualified or qualified.

What is the cost of trading?

The costs associated with trading stock on a brokerage platform can vary significantly, and even small differences can really eat into your potential gains so it’s important you are aware of all of the associated costs before you start investing in shares. The costs to check are as follows:

Platform fee: This can be charged at a monthly, quarterly, or annual rate. Some platforms will waive this fee entirely.

Cost per trade: This is the fee you will pay every time you buy or sell shares. This can be as high as $19.95 for some platforms whilst other platforms will offer zero-commission trading.

Frequent trader: This is a reduced fee for traders who make over a certain number of trades in a given time frame.

Annual custody fee: This is the charge for managing your investments and can either be a flat fee (great for large investment pots) or a percentage of your total investments (which is a better option for small investment pots). Again, it is worth looking for providers who have waived the custody fee entirely.

Phone dealing fee: This is only relevant if you intend to place trades over the phone. If you are comfortable with trading online then you can completely eliminate this fee. Not all platforms will accept trades over the phone so this is also something to check if relevant to your style of trading.

Exchange Traded Funds fee: ETFs or Exchange-Traded Funds come with a fee to cover the cost of managing the fund. This is usually expressed as a percentage of your investment or a flat fee. However, some platforms will waive this fee entirely so, again, it is worth checking.

Management fee: A number of different funds offered by brokers will require careful management and therefore often attract a management fee to cover this service. Again, this can be expressed as a percentage of your investment, a flat fee, or zero fees.

Is it safe to trade shares online?

Trading online is actually very safe as reputable trading platforms will be authorized and regulated by all the relevant authorities both at federal and state level. However, as with any share trading activity, there is always an element of risk and the value of your investments can fall as well as rise, regardless of how well-researched your investment decisions are.

Can I buy stock at any time?

The beauty of having an online trading account is that it provides access to your account at any time of day or night. Most trading platforms now have an app that you can download on your mobile, meaning you can invest in shares on the go. Remember, the share price is dependent on demand, and therefore timing the purchase of shares can be paramount to successful share dealing.

Can I buy stock for free?

It is actually possible to obtain free shares if you open a new account with a trading platform that offers a free share as part of their onboarding process.

I have gone into this in more detail in our How to Get Free Stocks and Shares in the US guide.

Best trading platform to buy shares

Additional Information

Should I sell my stocks if they go down in value?

As soon as the value of a company’s stock starts to move negatively it can be extremely tempting to immediately offload your holdings and sell your stock. Oftentimes, however, this is a “herd” decision that is led by emotions and is rarely the right course of action. Once you sell shares that have fallen in value, you have locked in the loss.

Conversely, if you sit tight, you are giving those shares the opportunity to recover and increase in value again, recouping any potential losses for you. Shares will always fluctuate in value, which is the reason professionals will advise investors to invest for a minimum of five years.

What do I need to open an account on a share dealing platform?

An account can be opened in moments and is usually fully digitized. You will be asked to provide some personal details as well as your bank details. Then you simply need to fund your account and you are ready to buy shares.

Do all the share dealing platforms offer the shares I want to buy?

No, the choice of investment options will vary from share dealing platform to share dealing platform and it is totally up to you to ascertain whether the platform you have in mind is offering the range of investments you want to buy.

What are the tax rules surrounding share dealing?

Any gains that you make on your own investments are subject to capital gains tax. In 2021 and 2022 this is 15% or 20% on most assets held for longer than a year.

For further clarification about your unique circumstances, please seek independent advice.

Where can I find more information on how to buy shares?

Each platform has an education and information center that will help you make informed decisions when you buy shares. This can come in the form of articles, videos, graphs, news, and blogs. Some share dealing platforms will have a more robust education section than others to help you with your investment decisions when it comes to buying and selling shares.

If you are still unsure whether share dealing is right for you, then you should seek independent financial advice.

What is the minimum amount of cash I need to start buying shares?

Many platforms will allow you to open an account and start investing with as little as $1. There are, however, considerations that should be taken into account, such as the platform fees, which with small investment amounts can start to erode your gains and the original investment amount.