The stock market—everyone knows it’s where you go to make the big bucks. From conservative banking institutions to aggressive day traders, anyone with a few thousand dollars to invest is rearing to double, triple, or even quadruple their assets by risking it all on the stock market. Yet, many average people don’t know how to invest in stocks.
To purchase stocks, you must first open and fund a brokerage account with a registered broker. Then, you can place an order to buy stocks through the broker. The order will be sent to the stock exchange, where it will be matched with a corresponding sell order from another trader. The trade will then be executed, and the shares will be deposited into your account.
In this guide, we’ll walk you through the step-by-step process of investing in stocks. We’ll also talk about some alternative methods that are a little safer than purchasing stocks directly from a company. If you’re ready to become the next venture capitalist, let’s dive in!
Can Anyone Buy Stocks?
In a way, yes, anyone can buy stocks. However, that doesn’t mean that you can simply walk up to the counter of the New York Stock Exchange and purchase a chunk of a company. Instead, you’ll have to invest through a registered broker. Brokers are individuals or firms that are licensed to buy and sell stocks on your behalf.
If you are new to investments, your best bet is to go through a reputable brokerage firm. In the United States, brokers must be regulated under the Financial Industry Regulatory Authority (FINRA) and, by working with an industry-standard firm, you can ensure that your assets and financial information are completely safeguarded. Some of the most popular brokerage firms include:
- TD Ameritrade
- Charles Schwab
These four firms currently manage a combined total of $22 trillion worth of assets. They are protected under FINRA and can protect your investments from fraud and abuse in the securities industry.
The Process of Purchasing Stocks
After you have registered with and deposited money into a brokerage account, you can begin placing orders to buy stocks. The most common type of order is a market order, which simply means that you are willing to buy shares at the current market price. For example, if a stock is trading at $10 per share, you would be willing to buy shares at that price.
Another type of order is a limit order, which allows you to set the maximum price you are willing to pay for a stock. For example, if a stock is trading at $10 per share, but you only want to pay $9 per share, you would place a limit order. If the stock price falls to your limit price, the order will be executed and you will purchase the shares.
Once your order has been placed, it will be sent to the stock exchange, where it will be matched with a corresponding sell order from another trader. The trade will then be executed, and the shares will be deposited into your account. You will then be able to hold on to the shares or sell them at any time.
If you sell the shares, the proceeds will be deposited into your account and you can then use the money to reinvest in other stocks or withdraw the money from your account.
Now that you know the basics of how to invest in stocks, let’s look at a few alternative methods that are a little safer than purchasing individual stocks from specific companies.
Investing in Stocks Through a Fund
Although many venture capitalists purchase individual stocks, you can also indirectly invest through a mutual fund or exchange-traded fund (ETF). Mutual funds and ETFs are generally managed by large banking and investment firms, such as Merrill Lynch and Vanguard, who invest in a basket of stocks on your behalf.
By diversifying your investments across a portfolio of stocks, mutual funds and ETFs provide a cushion against sudden drops in the market. For example, if one company underperforms, any losses will usually be offset by the gains from another stock in your fund. Additionally, mutual funds and ETFs give you the chance to invest in larger companies that often cost several thousand dollars for a single stock.
Funds usually produce stable annual returns ranging from 9% to 15%. While this may be slightly lower than what you’d earn from a single stock, the added safety of a diversified portfolio makes mutual funds and ETFs a smart choice for long-term investors.
The Bottom Line
The stock market can be a great way to earn a significant return on your investment. However, it’s important to remember that stocks come with their own risk and can lose a huge chunk of value in a short amount of time. Be sure to research registered brokerage firms before trusting your assets to anyone and be smart about where you invest.