Investing can change your life and open up a world of opportunities … but only if you know how to actually purchase shares in the companies you want to own.
So, how do you buy stock?
Assuming you’ve paid off your high-interest credit cards and saved up an emergency fund, you’re ready to open a brokerage account. You can check out our Broker Center to find the best one for your needs (we prefer online brokers because they’re low-cost, convenient, and transparent with their fees and commissions).
We think a great first purchase in your new brokerage account is an index fund. These funds don’t look to beat the market — they look to match it as closely as possible. That might not sound super-exciting, but consider that index funds offer:
- Instant diversification: When you invest in an index fund, you’ve instantly spread your dollars across industries, markets, currencies, and countries, substantially lowering your risk in the process.
- Low costs: Index funds have much lower expenses than actively managed mutual funds. The average actively managed U.S. fund charges its investors 1.4% for the privilege of owning shares. The Vanguard 500 Index (VFINX) fund, meanwhile, carries an expense ratio of only 0.16%.
- Superior returns: Surprisingly, buying an actively managed fund will likely hurt your returns, and not just the money you’re paying in fees. Numerous studies show that you’re likely to underperform by investing in a typical Wall Street fund. And again, it costs more.
Then we get to stocks. The key to becoming a successful investor is understanding the importance of timeline and temperament. We’re big fans of buying great companies and holding them for the long term, and not freaking out with the daily fluctuations in the market.
What stock do you start with? It all depends on your interests, your style, and your timeline. We recommend you find a company you know something about. Maybe you shop there, eat their food, or use their computers. Do some research — we recommend clicking over to CAPS, our stock-picking game, to see what investors’ sentiment is — but don’t feel a need to go overboard in your analysis. If it’s a company you love, buy a share. Even if it’s not the best value in the market — heck, even if it tanks — you’ll learn much more from making that first stock purchase than you would reading the thickest investment tome. And you’ll be able to call yourself an investor!
Once you’ve bought that first share, follow it, get to know it, read the quarterly earnings releases, listen to the conference calls, and see how the stock’s daily fluctuations affect you. For future stock purchases, you should keep trading costs and commissions to less than 2% of your total purchase amount, but we’ll let that slide on your first buy.
From there, you’ll be shooting to beat the market with each stock you buy. Ultimately, we think everyone should own at least 15 stocks to reduce your risk and increase your odds for success. But start with one.
Obviously, that’s only a very quick look at how to buy stocks. We’ve compiled the 13 Steps to Investing Foolishly for a more thorough look at making your dreams come true through investing.
And if you’re looking for great companies to buy, take a look at our premium newsletter services, which provide plenty of ideas for your investment dollars.