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Step 7: Buy Your First Stock

You've paid off your credit cards. You've saved up an emergency fund. You've opened a brokerage account. You've done your research, compared notes with like-minded Fools, and found the stock of your dreams. Let the guns blaze!

Whoa there, cowboy!
Hey, we're just as excited as you are that you're ready to be a stock owner. But before you go knocking on Mr. Market's door, bearing cash and gusto, let's keep some perspective.

First, this is just one of many investments you'll end up owning. That's to say, you want to invest in sips, not gulps. Your first purchase should be as petite in size as it is bold in spirit. Second, don't forget that your first investment is also a learning experience. As any craftsman will tell you, there's no better way to learn than by doing.

A journey of a thousand miles begins with a single step. And that's what we recommend to you: Buy a single share of your favorite stock. Just one. This one share will teach you more about life as an investor than we could ever hope to teach you here. 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.

But there's something else we want you to pick up while you're making a stop at your friendly broker: A stake in an index fund.

The passive investor's best friend
How many times have you heard someone ask, "How'd the market do today?" But what is "The Market?" And how do we know how it did? Usually, the answer reflects the performance of an index -- such as the Dow Jones Industrial Average or the Standard & Poor's 500 -- rather than the market as a whole.

What all indexes have in common is that the value of the index changes proportionally to the value of the stocks in the index. So when the index goes up, the aggregate value of the stocks in the index has grown by a proportional amount, and vice versa.

And you can invest in those indexes -- through index funds. These funds don't look to beat the market -- they look to match it as closely as possible. That might not sound enticing at first blush, but consider that index funds offer:

  1. Instant diversification: When you invest in an index fund, in one fell swoop you've spread your dollars across industries, markets, currencies, and countries, substantially lowering your risk in the process.
  2. 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%.
  3. Superior returns: According to the Fool’s own research, only 42% of actively managed funds beat the S&P 500 through the 15 years ending January 2009. And we're not alone; numerous studies show that you're likely to underperform by investing in a typical Wall Street fund. And as we just pointed out, you’ll pay a lot more for that privilege.

Little wonder that we think index funds should be the foundation of your portfolio (more on that in Step 8). But for now, we simply recommend that for every dollar you put into individual stocks, you roll the same amount into an index fund (the Vanguard fund we mentioned above is good choice).

But about that stock
Yes, we Fools love index funds, but we also believe everyone should own at least one stock (and ultimately, at least 15 to reduce your risk and increase your odds for success). Why? Well, it's fun (really!). By owning a stock, you have your own little piece of history, and you get to witness firsthand the power of capitalism and entrepreneurship at work.

But just as important, if you want to beat the market, you simply can't do that by investing only in index funds. In fact, your goal for every stock you buy should be to outperform the index. So get out there and start having some fun on your way to market-beating returns. 

Action: Invest in an index fund, and buy your first stock!


Read/Post Comments (28) | Recommend This Article (407)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2010, at 12:11 PM, VintageBarry wrote:

    I have heard so many positive comments about index mutual funds. Granted, they are cheaper to own; however, in checking performance of such under the umbrellas of Vanguard, T. Rowe Price and Fidelity, I just don't see where index funds come close to the capital gains realized with many of the non-index funds.

  • Report this Comment On March 04, 2010, at 1:56 PM, tradetoday wrote:

    I think Motely Fool is great. I love all this FREE useful information. Keep up the great work!

  • Report this Comment On April 14, 2010, at 11:49 PM, animallee wrote:

    Makes sense but when you are small time like me, its hard to diversify right off the bat.

  • Report this Comment On July 06, 2010, at 6:48 PM, JRBENSEN wrote:

    as a rookie, and with time on my side (30 years before I plan to retire), should I be overlooking blue chips like Microsoft or GE and be aiming straight at small cap growth stocks?

  • Report this Comment On July 20, 2010, at 8:31 AM, romanceranch wrote:

    I want to buy just some individual stocks. Most of my retirement money is in 401K and managed. If I can't put $2000 in an account to play with but just want to buy some stock, where's the best place to start?

  • Report this Comment On September 07, 2010, at 3:46 PM, ServusDei7 wrote:

    Jarvis:

    Go to Zecco.com and buy BRK. Zecco gives you free trades if you have over $25000, otherwise it is only $4.50 per trade, far cheaper than any other website. BRK is the safest stock out there, since it contains a basket of many companies, with valuation similar to S&P, so it really resembles index fund. When you learn more about selecting stocks, you can select others on your own to diversify

  • Report this Comment On February 10, 2011, at 4:33 PM, rickjen01 wrote:

    I started buying my first stock when Ford was just over one dollar per share, so I got pretty lucky so far. I then bought some Las Vegas Sands, and so far, still lucky. But, It was all luck. I am still ignorant as to bying and selling stock, so I subscribed to the Motley Fool..... it's alot to take in. Can someone tell me if I sell shares, how long do I have to use that profit to buy before it is considered a profit for tax purposes?

  • Report this Comment On February 13, 2011, at 12:31 PM, ssaini wrote:

    I am totally new. Can someone guide me how to start to invest in stocks and share market. I don't know any thing about it.

    Appreciate your reply!

    Thanks,

    Sanjeev

  • Report this Comment On February 18, 2011, at 4:35 PM, mountain8 wrote:

    Dear Motley Fool,

    Why aren't you reviewing these very important comments and answering the questions. These are newbies who need a lot of guidence. Don't you have a monitor?

    Everybody else,

    I'm not with TMF and I don't get paid by anybody but myself. So here goes, my thoughts only.

    Barry,

    Index funds probably don't make as much cap gains as good, solid individual picks (i've never checked). Index funds, like they recommend, is a place to START investing. As you gain knowledge and experience you will find you can make much more cap gains in other ways.

    P.S. the negative is, when the market goes down, so does the index fund.

    Animalee,

    You've missed the point. When you're small, Index funds DO automatically diversify your investment. However, some (or most) require a minimum starting deposit ($250 - $2000 is common)

    Jarvis and everybody,

    You're on the right site (the motley fool (TMF)). Another I like is Fidelity Investments. Or the Street, or Wall Street Journal. But if you want someone to tell you what stock to buy, you shouldn't be investing! YOU HAVE to do your own research and make your own decisions. This isn't a game, it's your future and your money. If you have to trust your future to somebody else's choices for you, you're going to end up in a big, dark, deep hole.

    Please, don't act on anybody's opinion, not even the places I recommend. Act on what you learn and know and believe. Good Luck.

    Jrbenson,

    Read the above. You can get advice from anybody from your mother to the President, and they can ALL be wrong. Stay on the Motley Fool site and learn all you can before you put your money up for grabs.

    Rickjen,

    Congrats. Don't expect those gains with every investment. You will pick losers also, everybody does, even all those expensive advisors.

    If you are not in a Roth or IRA, you owe taxes the micro-second you sell. This is not like a house.

    Ssaini,

    Go to TMF and study.

    All,

    Investing is not a spur of the moment thing! Congratulations on wanting to take your future in your own hands and starting to invest. You don't need a college degree, a highschool degree or a brokers licence. All you need is a little knowledge and the nerve to put the first foot forward, in that order.

    The Motley Fool is one of the major places with gobs of free information and knowledge. Surf the site extensively. Click every button. It's pretty user friendly. Of course that could take centuries. TMF has more information than one person can ever take in and a lot of it is specialized. And can, and should be avoided by beginners.

    Start on the home page http://www.fool.com and read all you can, then spread out. Read the blogs. Ask questions. Absorb.

    Another great learner tool is Fidelity (and a good place to buy AFTER you've learned) https://www.fidelity.com. I believe both are free but you will have to register. (both also have premium areas and tools that cost $$, just like World at War.)

    I trust both these places but you can find thousands of others on your own. Do a Google for "Investing" and you'll find 89 million hits. Do yourself a favor and start with these two at least until you have learned how to navigate to the info you need. These are immense sites. Sometimes overwhelming and using terms you will not understand. Investing has it's own language so be patient with yourself. Have a dictionary handy.

    Investing is a new world for most of you. It is a great world but it has it's dangers and complications. Be brave, be knowledgeable, be careful. Good luck. You've taken the right first step to the rest of life's great journey.

  • Report this Comment On July 28, 2011, at 2:20 PM, sgperformer wrote:

    Dear Mountain8 -

    Wow! What an incredibly fantastic post. My hats off, and thanks for all the great info!

    SG

  • Report this Comment On August 26, 2011, at 11:41 PM, willowmeadows wrote:

    I am going to start investing in stocks with an intial $2000 of extra money that I have. I just opened an account with ING direct thinking that it would be cheaper than going through Vanguard where I have most of my 401K Mutual fund money. Any feedback or direction would be greatly appreciated.

  • Report this Comment On September 07, 2011, at 3:24 PM, erniemink wrote:

    GOOGLE is it!

  • Report this Comment On September 19, 2011, at 10:40 AM, antima wrote:

    CHRI willing to break out for 500%

    this month is best entry point .

  • Report this Comment On December 01, 2011, at 11:39 PM, newDimension wrote:

    Hello, I am a conservative investor. I have been noticing that the stock market has been going up to about 12,000 and then it drops to 11500 or 11000. The market again starts climbing to 12000 and then drops.

    Is this the new way of investing? One has to be really on their toes and keep watching like a hawk or has this been always the case?

    In reference to buy one stock, how about having an account in http://www.investopedia.com and then starting/ playing the stock game with play money?

    I agree, it is you only the one who needs to read, gain knowledge and based on the comfort level buy and sell. Ultimately it is your own decision.

    Even buy reviewing the nos on a monthly basis one improves their knowledge and grasp.

    Thank you,

  • Report this Comment On January 07, 2012, at 5:42 PM, jerrywoods75 wrote:

    Hi, I'm real new to this but have been reading info on the Motley Fool site for a while and have finally signed up with SA or have I sign up for the new year. I have never bought a stock before but after reading posts it looks like I should be buying core and then maybe some recommended stocks. If I were to start with a lump sum of $5000 how would I distribute this? How many stocks? And then I would have about $100 per month. How would I distribute that? When would I know to get into a new stock over the years?

    And another question, what is a good online broker to go with?

    Would it be wise as a new investor to just give $5000.00 to be invested to see what would happen?

    Thanks,

    jerrywoods75

  • Report this Comment On January 18, 2012, at 8:22 PM, hsinvestor wrote:

    To any new investors,

    Invest in a company that makes something you would buy. Make sure the company is compliant with whatever moral affiliations you may have and check multiple sources before buying it.

    For example:

    You own an iPhone. Your friends own iPhones. Everyone you know owns an iPhone. Maybe you'll think about buying a few shares of Apple (AAPL) or you could buy a few of the companies that make components of the iPhone. (Cirrus Logic Inc (CRUS) and Multi-Fineline (MFLX))

    But like I said, check multiple sources!

    I like Vanguard for online investing and Bloomberg and Google Finance for doing some of my research. I also use some of Vanguard's tools to find out more about a specific stock.

  • Report this Comment On January 22, 2012, at 8:52 PM, ushats wrote:

    Thanks for all the advice. still confused. What do you research exactly when you decide to buy a stock? for example this months recommendation from David is 3 D system. i read David's comment. what else should i looking before putting money down and what should i monitor after I buy to know trouble is brewing .

    Most of my retirement is in 403 and index funds but I joined SA to do make some money for the future

  • Report this Comment On February 09, 2012, at 7:31 AM, mitch1951 wrote:

    Cudos to all you new investors. The easiest ways I have found to learn to invest are:

    1) Set up an account with a brokerage house. I use Schwab and Vanguard. Both are low fee. Between the two, you can buy anything.

    2) Find someone who already has experience like an uncle, friend, etc. who you can learn from.

    When you talk to the brokerage houses, ask them to educate you about mutual funds (automatic diversification and managed), Exchange Traded Funds (groupings of stocks by markets, size, etc.), and individual stocks (where your knowledge and information from Motley Fools can improve your return over the overall market.

    They want you to come back so will take the time to provide information or references.

  • Report this Comment On August 31, 2012, at 9:42 PM, NickD wrote:

    Walmart.......

    McDonald -YUM Brands

    Coke-Pepsi

    Nike...

    thats my advice

  • Report this Comment On November 26, 2012, at 1:12 PM, bradf926 wrote:

    Just curious, as I am also new to investing. In the article it is said to put money into an index fund as well as buying a stock. So following the guide I purchased my first stock - Intel. I looked into the mutual fund, but it says a minimum $3000 investment. Now...I have already invested in that very mutual fund through Vanguard as part of my IRA. So is there any reason to do it again through my broker, seperate from my IRA?

  • Report this Comment On December 23, 2012, at 11:02 PM, NickD wrote:

    IRAs Great up until you want to invest more than 5k a year.

  • Report this Comment On February 13, 2013, at 8:17 AM, Fredrickgood wrote:

    An information that I can add to this discussion for a newby, is that there is a presentation of a new good website which explains what stocks to buy and what are the <a rel="nofollow" href="http://www.youtube.com/watch?v=mXkYtEfEyjE">Best stocks to buy in 2013</a>. It is interesting for the method used. Kind regards, Fredrick

  • Report this Comment On June 25, 2013, at 6:57 AM, charmboy wrote:

    If you intend to start investing in stocks "TMF way", I find no better place to start than reading TMF books, as well as reading everything Peter Lynch has to say about picking stocks. It will help you greatly in the short/long run, by developing in you a stronger understanding of the subject matter, which you will certainly need later during your research phase.

    You also need discipline in regards to research, money and investing. Without it, success will elude you.

  • Report this Comment On September 03, 2013, at 2:37 AM, Hugoochoa wrote:

    It's 12:35 here. I need to wake up at 4:30am to work... Tired of working for money. Time for money to work for me. I am going to start investing, but after reading these comments, I will first get to know TMF at first. Read, aquire the knowledge needed. Then buy my first stock as recommended. Wish me luck. And if you are reading this and haven't done anything your self either. The thought of investing will never leave you... You already have one foot in the door. Time to close that door behind you my friend.

  • Report this Comment On October 26, 2013, at 12:57 AM, Softwarekit wrote:

    Buy stocks you think are undervalued then sell when you think they are overvalued

  • Report this Comment On January 28, 2014, at 12:22 PM, ejiro wrote:

    Thanks a lot for all the info.

    At least something is gain and will be apply at the necessary time. Thx.

  • Report this Comment On February 21, 2014, at 5:14 AM, Teejay wrote:

    Thanks everyone for all this information. I guess the best place to start is at the beginning.

    I know nothing and I will take that approach!

  • Report this Comment On June 18, 2014, at 5:55 AM, AmeliyaDukre wrote:

    Hello everyone. Please somebody help me. I want to invest in ALPC, but don't know about this nothing. Does anybody know something?

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