Buy stocks: how to buy step by step

New investors will eventually come across the stock market and should be prepared for it. Are you one of those who would like to get into stock trading and earn some passive income? That’s a great idea, but you must know some things before starting.

That’s why we prepared a complete guide on how to buy stocks, as well as some of its pros and cons. Keep reading to understand everything about this market and get an easy step by step process to buy your first stocks and start earning more for your investments.

However, if you’re looking for investments according to your risk profile you might want to check our other articles first.

Before you buy stocks: is it a good idea?

So you decided that it’s time to buy stocks as a safe investment, is that is? Great! But we’d like to get you out of the sea of misinformation that’s the internet and understand exactly what you’re getting into here. The stock market can be very profitable, but it involves a certain deal of risk.

Certainly, great risks also come with great benefits. So we’ll describe each of the advantages that go hand in hand with buying stocks for you to understand everything much better.

1. You could earn much higher returns

Everyone wants a passive income these days and it’s understandable. After all, why wouldn’t you want to make money while you sleep? It’s the best option when it comes to preparing for your retirement or making some extra cash to reach those life milestones everyone waits for.

When you buy stocks there’s a much higher return in a much smaller period of time. Savings accounts, even if you’re looking at high yield options, rarely get more than 1% or 2% interest rates. Other investments come close to that number and nothing much higher. Even ETFs don’t come close to the earnings of stocks.

Since 1926 the average returns from the stock market have been about 10% a year. That depends on the stocks you buy, but it’s much greater than most other choices. To compare: government bonds are usually around 5% to 6% a year.

2. It becomes a passive income over time

Whenever you buy stocks you become an investor in the company that traded them. Most of them pay dividends to their investors annually and it becomes a way to keep a stable passive income.

Here we must differentiate stocks and bonds so that you can know which to buy and when. Firstly, stocks and bonds aren’t the same thing at all, although the public often confuses them. Bonds are actually a type of “loan” an investor makes to an entity, such as the government.

These “loans” have a maturity date, which is when the money is repaid to investors. The payouts are guaranteed, but they happen in the long-term. When the time comes, you’ll get all of the invested money plus the interest rates for the years it stayed in work with the entity.

Meanwhile, stocks are “part” of the company and earn higher returns in a shorter time. They come with the possibility of earning yearly dividends whenever the company goes well. If the economy remains stable, you should manage to keep earning more and more with the stocks.

Over time, they become a high-yield type of passive income.

3. Protect your wealth from inflation

In a stable economy you can buy stocks to protect your money from inflation. This doesn’t happen with a simple savings account, for example, that has an interest rate lower than that of inflation during the best of times. Now imagine what happens when we go through times of crisis, putting money in your savings is basically a waste.

4. Investment with liquidity

These are liquid assets! When it comes to bonds or ETFs you’ll need some time, maybe some months, to convert the investment in cash in case of need. Those who buy stocks are different, since they can transform them into cash in just a few hours by selling them.

Stocks are even more liquid than other assets that already have liquidity. Take real estate, for example. You can sell a house any time you’d like, but it won’t be immediate. When the market is in crisis it can take months or even years.

5. Diversify your investment portfolio

For more advanced investors, getting stocks is the ideal chance to diversify their portfolio. It’s important that people keep as many sources of passive income as possible. That means you have higher liquidity in your investments, so you can get money faster when you need it, and will be more protected against inflation at the same time.

How to buy stocks step by step

If you kept reading until here you’re likely sure that it’s time to buy stocks. That’s great news and you can start easily with the following tips. You can start slowly, buying just a few shares and slowly building a larger wallet of investments or even use a large chunk of savings. The choice is yours and everything starts here.

1. Use a brokerage account

Stocks are bought and sold using stock exchanges, a type of market for these investment products. But you can’t access them directly without using a brokerage account. They’re a lot like online bank accounts that allow you to buy stocks easily.

To open one all you have to do is look for a licensed brokerage firm. There are dozens of them all around the USA, but remember to check their credentials before starting. Some options of brokers that will help you buy stocks include:

Full service brokers;
Discount brokers;
Robo-advisors.

Each of them has a different price and set of perks. If you’re looking for a low cost option to start investing in stocks, for example, robo-advisors are great. These AI based services use your financial and risk patterns to suggest stocks and investments.

2. Research the stocks you’re looking to buy

There are literally thousands of stock options to buy. They include companies from many sectors and even different countries that could yield fast or slow returns. Do you know what that means? That you’ll need a lot of research before closing the deal.

Remember that a share means you own a small part of the company. So look for areas that interest you or maybe that you’ve been involved with in the past. It’s also important to look through everything you can about the company you’re buying from.

If you’re looking to build a passive income type of investment, then it’s important to find out which are dividend stocks. You should also learn about the company’s stability and how its growth was in the last quarter or semester.

Some companies are underpriced, this is the ideal stock to buy! After all, they should start growing fast and soon, which will earn great returns when you decide to sell the shares.

3. Decide the quantity of shares to buy

Before you buy stocks it’s important to decide the quantity and how much you’d like to spend. Remember that there’s no minimum, so you can start small and put more money towards this investment over time. But having a schedule helps not to overspend and still guarantee the best possible returns.

Here’s a warning for those who are still starting: investing in stocks is fairly safe, but unpredictable all the same. A sudden market crash can happen at any moment, leaving shares undervalued and well below the price you bought them for.

This means you should never invest more than you can afford or compromise money that should go towards other payments. Let’s say you’d like to put some of your mortgage payments towards investments instead, don’t do it. It could earn some profits, but the chance that it could ruin you financially is still there.

4. Buy stocks using your account

Did you finish the creation of a stocks portfolio? Then the time you were waiting for is finally here: let’s buy stocks! You’ll have to do that within the U.S. Stock Exchange Market open hours, which are between 9 a.m. and 4:30 p.m.

At the moment of the purchase you’ll have to choose one of the following order types:

Market order: you’re purchasing the stock immediately without guaranteeing its price. These are the most common types of orders because it makes sure that you can buy those shares. Most long-term investors use this type of order;
Limit order: it specifies a certain price for your order. That means that unless the stock reaches that number it won’t be bought. This usually means you have to wait for a seller to accept the price you determine. Most brokers charge more for this type of order, so you should check every detail before starting the bid.

Once the order happens your investment portfolio will get an update. Which means you are now the proud owner of some shares that should start earning returns soon.