For many people, getting started with investing means investing in the stock market. But figuring out how to buy stocks can be a daunting task for a beginning investor.
Let's go over the basics, including how to set up an account and what to do as you begin to invest your money.
How to set up an account
With the rise of online brokerage firms, average investors now have access to a wide variety of places to invest. But with so many choices, investors need to decide which one is best for them.
In choosing a brokerage firm, there are a few key factors to consider.
Safety: While a brokerage firm cannot protect you from losses in the stock market, it's important to make sure your brokerage firm is legitimate. Be sure to read reviews of the firm and see what other customers think. Also make sure the firm is SIPC insured. Similar to the FDIC, SIPC protects up to $500,000 in account equity in the event of a brokerage firm's insolvency.
Commissions and fees: When you make a trade, brokerage firms charge a commission as a way to cover their costs and make money. Firms also have various fees for certain other services performed. Both commissions and fees vary greatly by brokerage firm, so be sure to fully examine them before setting up an account. Lower commissions and fees are obviously preferable, but other factors need to be considered.
Research tools: Depending on the firm, your account may or may not come with research and data provided by the firm. For both beginning and experienced investors, this research and data can be very helpful in choosing investments.
Investment access: Some brokerage firms provide access to a wide variety of investments, while others are more narrowly focused. Depending on how you plan to invest, a wider variety of choices may be required. Pretty much all brokerage firms allow stock and bond trading on U.S. exchanges, but they don't have equal access to stocks trading in other countries.
To choose the ideal brokerage firm for you, make sure you closely examine brokerage websites and read independent reviews. If you find yourself in a situation where you cannot decide, you can always open multiple accounts to get the benefit of multiple firms. Just remember that the more accounts you have open, the more paperwork you'll have to deal with.
Decide on your investment goals
This is when you ask yourself what your reason for investing is. Are you trying to keep your money safe while generating a little income? If so, consider large, lower-risk companies with a history of decent returns. If you're willing to take bigger risks on fast-growing investment in hopes of greater reward, make sure you only invest money you can afford to lose.
Doing your research
One of the first rules of investing is to do your own research and make sure you know what you're buying. The stock market was built by and is run by people with a lot more money and experience than you, so it was not designed to be easy for beginning investors to navigate.
But don't give up. Everyone was a beginner at some point, and this disadvantage can be mitigated by doing research into your investments.
Get as many perspectives as you can and take a look over the company's SEC filings. The 10-K is a particularly useful one for hearing the company's risks and outlook. SEC filings and certain other pieces of company information should be available on the company's "Investor Relations" web page.
Most brokerage firms allow orders for stocks traded on major U.S. stock exchanges to be placed online. There are a few ways to placing an order. A "market order" buys at the price the market is willing to sell as soon as the order is placed and shares become available. A "limit order" allows you to set a price you're willing to pay and only makes the purchase once the shares can be obtained at your set price.
For stocks with a wide bid-ask spread -- that is, the difference between what you offer for a share and what the seller is willing to accept -- limit orders tend to ensure a fairer price. You can also use limit orders when you have determined the price you're willing to pay for a stock and are willing to wait for it to hit your buy price.
Taking the first step
Congratulations on taking the initiative to begin investing in the stock market. Whether you're saving for retirement or simply trying to accelerate your savings, it's an excellent idea to become more familiar with the financial markets.
As you continue to invest, continue doing your own research, updating your investment goals, and rebalancing your investments as needed.