How to Buy Stocks

While it may seem mysterious in some ways, investing in the stock market is really not that difficult.  This is not to say that beating the market is easy, or that every stock pick will result in making money.  Compared to things like real estate, however, it is fairly easy to learn the mechanics of stock investing, and the risks of poor stock choices are generally limited to the amount put into it (compared to the hundreds of thousands that could be lost when investing in real estate with mortgages).

The first thing to understand is that when investing in individual stocks, you could lose the entire amount very quickly.  This is not to say that it is likely to happen (out of 100 stocks, you may have 2 or 3 that lose 90% or more of their value and will never come back).  The point is that you should never put more into a single position than you are able to lose, because things do happen, even to what seem like solid companies.  For example, GE, Freddie Mac, and GM shareholders all lost most or all of their money in 2008. 

The main way of countering the risk of issues at a single company (or a sector of the market) causing a substantial loss is to spread the money out to a basket of stocks – what investment managers call “diversification.”  When starting out it is unlikely that you will have enough money to buy 10 different stocks (or 100 different stocks) as the financial magazines suggest.  There is nothing wrong with buying 100 shares of one stock with your first $2000 say.  Just understand that you could lose that $2000 and it should be thought of as an initial step into the market.  To really make money int he stock market you should plan to be acquiring shares over a number of years.  You should be putting money away regularly and each time you have $2000-$3000, buy another 100 share of stock.  Over time you will build up a portfolio of several stocks this way.

Now that the strategy has been laid out, what about the mechanics?

Stocks are purchased using a broker.  Finding a broker is fairly easy – some of the popular choices are Merrill Lynch, E-Trade, Charles Schwab, UBS, and Fidelity.   Like finding a doctor, the best process is to ask a friend or coworker for a recommendation.  Taking time to meet with the broker, discuss your financial goals and get a general feeling about their personality would be a good idea.  In general one would want to find an individual who will be willing to teach you about investing, rather than just sell you products.  A good place to start is the Endorsed Local Providers list at the Dave Ramsey website,    .  Once a broker is selected, an account is set up. and funded.

Once an account is set up, there is nothing left but selecting a stock and placing an order.  The process of selecting a stock is described in various posts on this blog  Traditionally individual would enter orders to their broker via phone (or some would hang out at the brokers offices).  Entering orders by phone is probably the best option for a new investor, although there are also a number of online brokers who allow individuals to enter trades via computer.  The advantage of this is that the cost of commissions tends to be lower.  The disadvantage is that there is typically little guidance (if you enter an order on the phone, the broker may point out a better way to enter the trade or a better choice of stocks).

Once the first position is established, just continue to save up money and invest. 

Your investing questions are wanted.  Please send to or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.