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The first-timer’s guide to buying stocks

Plus, our shortlist of outstanding online brokers

step 1:

Find a broker that you like

There are a lot of online brokers out there. So many, in fact, it can be overwhelming to weed through all the options — good and bad — and then confidently choose one. Social scientists call this “information overload”. We call it inconvenient. To make the search easier, we created this shortlist of standout picks from our partners and included their pros, cons and current offers.

BrokerCommissionsAccount MinimumCurrent OffersDetails

300 free trades

Merrill Edge's logo

on Merrill Edge's secure website

$6.95

per trade

$0

300

$0 online stock and ETF trades, no minimum deposit required

Pros

  • Robust third-party research.
  • Ongoing promotions.
  • Integrated with Bank of America.
  • Free trades for eligible Bank of America customers.

Cons

  • No commission-free ETFs.
  • Minimum balance requirement for active-trading platform.
TD Ameritrade's logo

on TD Ameritrade's secure website

$6.95

per trade

$0

60

days of commission-free trades with qualifying deposit

Pros

  • Large investment selection.
  • Free research.
  • High-quality trading platforms.
  • No account minimum.
  • Good customer support.

Cons

  • Higher trade commission.
  • Costly broker-assisted trades.
  • High short-term ETF trading fee.
E-Trade's logo

on E-Trade's secure website

$6.95

per trade

$500

Up to $600

cash credit with a qualifying deposit

Pros

  • Easy-to-use tools.
  • Large investment selection.
  • Excellent customer support.
  • Access to extensive research.
  • Advanced mobile app.
  • Reduced commissions for frequent traders.

Cons

  • Higher commissions for low-volume traders.
  • Minimum balance requirement for active trading platform.

step 2:

Pick your stocks

Once you’ve set up and funded your brokerage account, it’s time to pick stocks. A good place to start is by researching the companies you already know as a consumer.

Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. It’s important to keep your goals simple. Find companies that make you want to be part owner.

When choosing where to invest, take a look at the company’s annual report — specifically management’s annual letter to shareholders. The letter will give you a ton of insight into what’s happening with the business and provide context for the numbers in the report.

After that, most of the info and tools you need to evaluate the business will be on your broker’s website, such as SEC filings, conference call transcripts, quarterly earnings updates and recent news. Most brokers also provide guides on how to use their tools and even basic seminars on how to pick stocks.

step 3:

Decide how many shares to buy

You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio position in a stock all at once. Consider starting small 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 stock trading.

step 4:

Choose your order type

There are two order types that successful investors rely on all the time: market orders and limit orders.

MARKET ORDERS

With a market order, you’re indicating that you’ll buy or sell the stock at the best available current market price. 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, as they’re called (see our cheat sheet below), 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 ones.

Before you place a market order, there are a few things to keep in mind:

  • A market order is best for buy-and-hold investors who think small differences in price are less important than ensuring that the trade is fully executed or filled.
  • 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.

LIMIT ORDERS

A limit order gives you more control over the price at which your trade is done. If XYZ stock is trading at $100 a share, but 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. Limit orders are 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.

There are a few things to keep in mind before you place a limit order:

  • 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. This happens 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:

Learn the lingo

Get help navigating through all the numbers and stock trading terms. Spruce up your vocab with this trading terms cheat sheet.

Ask

For buyers: The price that sellers are willing to accept for the stock.

Bid

For sellers: The price that buyers are willing to pay for the stock.

Spread

The difference between the highest bid price and the lowest ask price.

Market order

A request to buy or sell a stock ASAP at the best available price.

Limit order

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.

Stop-limit order

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.

Final step:

Start buying stocks

High five! Now you’re ready to invest. To get started choosing a broker, check out our list of standouts above to find the right one for you.

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