How to buy shares for beginners
By Tristan Hoag
Posted in: General
The best way to invest in the stock market is to learn how to buy shares for beginners
The stock exchange is where fortunes are made – or lost. Big players can buy and sell on such a massive scale that their activity can swing the entire market. Learning to invest to take advantage of the volatile nature of the stock market has a steep learning curve, and a mistake can cost you money fast. If you’re trying to figure out how to buy shares for beginners, it can feel like getting ready to dive into a tank full of hungry sharks.
To help make the plunge a little less intimidating, JustAnswer has assembled this guide to help you learn stock market basics and get yourself oriented to start investing.
Choosing a broker
The first step to buying stocks is to set up a brokerage account. This isn’t a complicated process. You’ll have to be ready to:
- Fill out an application form
- Prove your identity
- Fund the account, electronically or by check
It’s a little harder to choose the right broker, and some time spent researching here can really pay off over time. When you’re looking for the right brokerage for your needs, take into account factors such as:
- Minimum requirements: Depending upon the amount of money you intend to invest, a brokerage’s minimum investment can be a prohibitive factor.
- Trading habits: If you expect to make frequent changes in your portfolio, a brokerage with high commission fees can be a problem. If you’re looking for a longer-term strategy with less activity, the commission fees may be less important than watching for inactivity fees.
- Customer support: This will be an important consideration, especially when you’re just starting out. The tools, educational resources, market research and knowledgeable advice that are a part of your account will be essential to understanding the investing world.
Choosing the right brokerage requires an understanding of your investment strategy.
Long-term investing: This approach uses mutual funds and exchange traded funds (ETFs) to offset risk, and is best suited to building value over time. Both are pools of shares, often chosen for you by an advisor, but offer different degrees of separation from market fluctuation. Mutual funds are more expensive due to maintenance costs, and their value is only determined at the end of each trading day. ETFs are often cheaper, but the value changes throughout the day in accordance with the market. This is a good place for beginners to start trading, or if you’re looking for investments for retirement or saving to buy a home.
Short-term investing: This is where those sharks swim! When you gain an understanding of how to profit from the ups and downs of the market, you’ll start to look at your investments differently. You look for chances to react to the fluctuations and buy into something that is going to increase in value, then sell it off for a quick profit. This is the world of short-term trading, where you’ll start purchasing individual shares as part of a strategy, instead of grouping them together to offset risk. This is a style of investing you’ll want to grow into, unless you don’t mind losing your money!
Depending upon the goals for your investments, you’ll be able to determine the kinds of trading habits you’re likely to have and figure out which brokerages will cater to your needs as you learn stock market basics.
Choosing your stocks
When you have chosen your brokerage and set up your account, it is time to start researching companies. It’s important to remember that you’re investing in a company every time you buy a share. The best advice is to buy into a company that you would want to own.
At this point, it’s easy to be overwhelmed by the amount of information you’re faced with.
Most of this information will become important as your understanding of investing grows, but to start, focus on the company more than the numbers.
Some things you should consider:
- Build a list of stocks you’re interested in and watch how their values change.
- Start with a small investment and add to it later.
- Decide at what values, high or low, you would sell the stock.
- Read the annual report to get insight into the data and what the company is trying to do.
This is when the customer support options for the brokerage you selected come into play. You should have access to company news, quarterly earnings reports, SEC filings and other background information, as well as analytical tools to start evaluating the company’s performance.
There’s no need to buy a lot of stocks at once; it’s often better to make a small investment in a company to start, and see how it performs before making further investments.
Understanding the terminology
When you’re ready to buy, it’s time to fill out an order form. You may run into some terms that you don’t recognize:
- Ask: This is the cost of the stock if you want to buy
- Bid: This is the value of the stock if you want to sell
- Spread: The range from the highest bid to the lowest ask
- Market order: An order to buy or sell immediately at the best price
- Limit order: An order to begin to buy or sell stock when it passes a certain price
- Stop order: Also called a stop-loss order, this is where you set the stop-price and as soon as the price is reached, the order to buy or sell is executed at the current price.
- Stop-limit order: Similar to a stop order, but when the stop price is reached, the trade turns into a limited order, buying or selling only when the conditions are met.
Although there are other types of orders and trading moves, you can take time to understand them and how they’re used. When discussing how to buy stocks for beginners, the most important orders to understand are market and limit orders.
Choosing your order type
Understanding the difference between market and limit orders, and when to use each type, is one of the first keys to investing for beginners.
Market orders: These are buy now or sell now orders. The order is executed immediately, and in full. Due to the fluctuations within the market, you don’t know what the actual price was until the exchange is completed, so market orders are usually only used on shares that aren’t prone to rapid changes.
You should use market orders for shares you plan on holding for a while, where minor differences in price are outweighed by long-term growth. Be sure to pay attention to how your brokerage handles execution; some will bundle customer orders and execute them all at once at a set time.
Limit orders: A limit order allows you to choose a price at which to begin buying or selling a stock. You can also exercise some control over the conditions of the exchange with different types of orders:
- All or none order (AON): The purchase or sale won’t occur until it can be executed in full.
- Good for day order (GFD): Stays active until either it is fulfilled or the trading day ends.
- Good till canceled order (GTC): This order will stay open until it’s cancelled or expires. These can result in multiple transaction fees which can increase the cost of the order.
When the price point is met, the order becomes active. Then, depending upon the conditions you established in your order, they’ll be executed.
The additional control makes limited orders a useful tool for responding to market fluctuations or when dealing with companies that fluctuate in their value. The cost of this flexibility is the possibility that the order may not be completed in full. Limited orders are considered a lower priority than market orders, and the shares that are left can disappear fast.
Using the different kinds of orders is a skill you’ll continue to develop as you learn more about investing.
But the most important thing to develop as an investor is a thick skin. Investment is about watching values rise and fall, but the loss doesn’t become ‘real’ until you sell. Note that this doesn’t mean it can’t get worse, so know when to accept the loss and sell! You’ll need to know how to avoid panic and keep your strategic goals in mind as you make your decisions.
It isn’t easy learning new skills like how to buy shares for beginners. There will inevitably be a need for clarifications and explanations for your financial questions, and the qualified finance Experts on JustAnswer can be an invaluable resource as you try to make sense of the world of investment.
Do you have any tips for beginning investors? Share them in the comments!