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Buying a stock — especially that first time you become a bona fide part owner of a business — deserves its own celebratory ritual.
But before we pick out shareholder party hats and rent a ticker tape confetti cannon, let’s review the specific steps for how to buy stocks.
Step 1: Open an online brokerage account
Wondering where to buy stocks? Movies love to show frenzied traders shouting orders on the floor of the New York Stock Exchange, but these days very few stock trades happen this way. Today, the easiest option is to buy stocks online through an online stockbroker.
Opening an online brokerage account is as easy as setting up a bank account: You complete an account application, provide proof of identification and choose how you want to fund the account. You may fund your account by mailing a check or transferring funds electronically. (We have a full guide to opening a brokerage account here.)
How do you find a broker that’s worthy of your dough? Two things to consider when opening an account to buy stocks:
1. The cost of commissions: The commission is the fee a broker charges each time you buy or sell a stock. Finding a broker that charges low or no commissions will be most important to active traders — generally, those who place 10 or more trades per month. (Learn more about the ins and outs of stock trading.) Commissions can add up quickly if you're trading regularly.
But all investors should consider costs, as they eat into your investment returns. In our analysis, we've found two brokers come out on top for commission-free trades:
2. How much support you want. Consider the broker’s offerings of educational tools, investment guidance, stock-trading research and access to real, live humans via phone, email, online chat or branch offices. This is especially important for beginner investors, as you will want knowledgable customer service representatives available to answer your questions.
In our research, Merrill Edge stood out for investor resources and customer service: The broker offers investors a notably large selection of research about stocks and other investments, and its website is stocked with educational videos, courses and webinars. (Read our full review of Merrill Edge.)
To compare all of your brokerage options, review NerdWallet's full list of the best brokers for stock trading, or use the search tool below to find the right match for your investing style. (Article continues below tool.)
Step 2: Select the stocks you want to buy
Once you’ve set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experiences as a consumer.
Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You’re looking for companies of which you want to become a part owner.
Warren Buffett famously said, “Buy into a company because you want to own it, not because you want the stock to go up.” He’s done pretty well for himself by following that rule.
Start with the company’s annual report — specifically management’s annual letter to shareholders. The letter will give you a general narrative of what’s happening with the business and provide context for the numbers in the report.
After that, most of the information and analytical tools that you need to evaluate the business will be available on your broker’s website, such as SEC filings, conference call transcripts, quarterly earnings updates and recent news. Most online brokers also provide tutorials on how to use their tools and even basic seminars on how to pick stocks.
To learn more about evaluating companies for your portfolio, see NerdWallet’s feature on how to research stocks.
You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with a stock all at once. Consider starting small — really small — by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master the shareholder swagger.
Step 4: Choose your stock order type
Don’t be put off by all those numbers and nonsensical word combinations on your broker's online order page. Refer to this cheat sheet:
Basic stock trading terms
For buyers: The price that sellers are willing to accept for the stock.
For sellers: The price that buyers are willing to pay for the stock.
The difference between the highest bid price and the lowest ask price.
A request to buy or sell a stock ASAP at the best available price.
A request to buy or sell a stock only at a specific price or better.
Stop (or stop-loss) order
Once a stock reaches a certain price, the “stop price” or “stop level,” a market order is executed and the entire order is filled at the prevailing price.
When the stop price is reached, the trade turns into a limit order and is filled up to the point where specified price limits can be met.
There are a lot more fancy trading moves and complex order types. Don’t bother right now — or maybe ever. Investors have built successful careers buying stocks solely with two order types: market orders and limit orders.
With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. Because a market order puts no price parameters on the trade, your order will be executed immediately and fully filled, unless you’re trying to buy a million shares and attempt a takeover coup.
Don’t be surprised if the price you pay — or receive, if you’re selling — is not the exact price you were quoted just seconds before. Bid and ask prices fluctuate constantly throughout the day. That’s why a market order is best used when buying stocks that don’t experience wide price swings — large, steady blue-chip stocks as opposed to smaller, more volatile companies.
Good to know:
A market order is best for buy-and-hold investors, for whom small differences in price are less important than ensuring that the trade is fully executed.
If you place a market order trade “after hours,” when the markets have closed for the day, your order will be placed at the prevailing price when the exchanges next open for trading.
Check your broker’s trade execution disclaimer. Some low-cost brokers bundle all customer trade requests to execute all at once at the prevailing price, either at the end of the trading day or a specific time or day of the week.
A limit order gives you more control over the price at which your trade is executed. If XYZ stock is trading at $100 a share and you think a $95 per-share price is more in line with how you value the company, your limit order tells your broker to hold tight and execute your order only when the ask price drops to that level. On the selling side, a limit order tells your broker to part with the shares once the bid rises to the level you set.
Limit orders are a good tool for investors buying and selling smaller company stocks, which tend to experience wider spreads, depending on investor activity. They're also good for investing during periods of short-term stock market volatility or when stock price is more important than order fulfillment.
There are additional conditions you can place on a limit order to control how long the order will remain open. An “all or none” (AON) order will be executed only when all the shares you wish to trade are available at your price limit. A “good for day” (GFD) order will expire at the end of the trading day, even if the order has not been fully filled. A “good till canceled” (GTC) order remains in play until the customer pulls the plug or the order expires; that's anywhere from 60 to 120 days or more.
Good to know:
While a limit order guarantees the price you’ll get if the order is executed, there's no guarantee that the order will be filled fully, partially or even at all. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade.
Limit orders can cost investors more in commissions than market orders. A limit order that can't be executed in full at one time or during a single trading day may continue to be filled over subsequent days, with transaction costs charged each day a trade is made. If the stock never reaches the level of your limit order by the time it expires, the trade will not be executed.
Step 5: Optimize your stock portfolio
We hope your first stock purchase marks the beginning of a lifelong journey of successful investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them. What you can do is:
Make sure you have the right tools for the job. NerdWallet’s list of the best stockbrokers can help you identify the right brokerage account for you.
Be mindful of brokerage fees. These can significantly erode your returns.
Consider also investing in mutual funds, which allow you to buy many stocks in one transaction. Here's our list of the best brokers for mutual funds.