SoFi

A stock is a share of ownership in a company, and theoretically anyone can buy stock in a publicly traded company assuming they have access to an investment account and can afford the share price. (Shares of private companies are not available on public stock exchanges.)

In addition to buying shares of stock directly, it’s also possible to own stock via pooled investments, such as mutual funds or exchange-traded funds (ETFs). Investors who can’t afford a full share of stock in some of the higher-priced companies can invest in a product known as fractional shares.

Because stocks represent a class of assets unto themselves, they are also referred to as equities.

How to Buy Stocks in 5 Steps

Here are step-by-step instructions for becoming a stock investor, including what to know about how to buy shares in a company.

Step One: Think About What You Want to Buy

To begin, investors may want to decide whether they’re interested in buying shares of individual stocks or shares of a fund, such as an exchange-traded fund (ETF).

Individual Stocks

As noted, a stock represents a share of ownership in a publicly traded company. These days, most investors buy stocks online. Many companies offer both common and preferred stock.

•   Preferred stock does not come with voting rights, but these shares typically pay dividends, a form of profit sharing that can provide steady income to investors.

•   Common stock comes with voting rights. These shares can be more volatile, but may provide higher returns — and common stock only pays dividends after preferred stock dividends are paid.

Stocks can provide a return on investment in two ways. The first is through price appreciation, which is the value of a stock increasing over time. The second is through dividend payments to shareholders, if applicable.

Ideally, shareholders are able to reap the benefit of a company’s wealth building over time. However, it’s very difficult to predict which stocks will be successful (because it’s hard to predict which businesses will be profitable in the future).

For this reason, individual stock returns can be volatile — although individual stocks also provide the potential for higher rewards. That’s why it’s often said that individual stocks are “high risk, high reward.”

Recommended: Stock Market Basics for Beginners

Fractional Shares

As the name suggests, fractional shares of stock offer investors the chance to buy a percentage of a share of stock, rather than owning a full share. Previously, fractional shares were available only to institutional investors, but now retail investors can enjoy partial stock ownership assuming their brokerage offers these shares.

Like owning a full share, owning a fractional share allows investors to realize the same gains, losses, and even dividend payments (proportional to the fractional ownership amount).

One reason to buy fractional shares is to manage cost. Some shares of certain companies can be expensive. A share of Company A worth $1,000 might be available as a fractional share for $250 (a 0.25% share).

Funds

A fund, whether an ETF or a type of mutual fund, can be thought of as a bundle of investments. Often, these funds invest in equities, but they can also hold bonds, real estate holdings, or some combination of all. For example, it’s possible to buy a mutual fund or ETF that holds the stocks of the top 500 companies in the U.S. (or even thousands of stocks across the globe).

An important thing to understand here is that investing in a fund allows you to invest in a fund’s underlying holdings. If a fund is invested in 500 stocks, for example, the fund is absolutely an investment in the stock market.

An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered less risky than owning an individual stock. That’s because it’s more likely that a few companies might underperform — not hundreds (although there are no guarantees).

Owning an equity ETF or mutual fund is still considered to be risky, as investors are still very much involved in the stock market.

That said, broad, diversified mutual funds and ETFs can provide an easy way to gain exposure to the stock market (and other markets, as well). In investing, diversification means buying different investments.

With the purchase of just one share of some funds, it’s possible to invest across the entire U.S. or even the world in a diversified way. Depending on where investors choose to open their accounts, they may have access to ETFs or mutual funds or both.

Step Two: Determine What Type of Account to Open

One big decision is whether to open an account that is specific for retirement, or a general investing account, i.e., a brokerage account.

•   A brokerage account allows investors to buy and sell various securities. But again, this term may be used as a catchall for general investment accounts, which are usually taxable accounts. Investment and brokerage accounts can be used for any (legal) purpose, and there are no limitations for use (unlike with retirement accounts).

There are several differences between a brokerage account and a retirement account, with one fundamental difference being the tax treatment of assets in these accounts.

•   Retirement accounts receive special tax treatment, and are often called tax-advantaged accounts. Tax-deferred accounts typically defer taxes on investment gains until retirement. After-tax accounts allow contributions funds where the tax has been paid; then qualified withdrawals are tax free in retirement.

This unique tax treatment is why so many IRS rules surround the use of retirement accounts, including contribution limits and income limits.

To keep it simple, investors may want to open a non-retirement brokerage or investment account, especially if they’re already covered by a retirement plan through work. For a retirement account, investors could open a Roth IRA, Traditional IRA, or a SEP IRA, or Solo 401(k), if they’re self-employed.

If investors opt to go the retirement route, they may want to check with a certified tax professional to ensure they qualify.

Step Three: Decide Where to Open an Account

When it comes to deciding where to open an account, new investors have plenty of options.

Before diving into them all, it’s helpful to remember that minimizing fees is the name of the game. Why? When calculating potential returns on investment, account holders must subtract any investing-related fees from potential investment earnings. Even small fees can mean that investments have to work that much harder just to break even.

Here are some options an investor might consider:

•   A low-cost brokerage: One option is to open an account at a low-cost or discount brokerage. Depending on the firm, there may be account and trading fees (although the lowest-cost brokerages have largely eliminated these in order to be competitive with the new financial tech companies).

•   An online trading platform: Another popular option is to use an online trading platform, where investors can buy shares of stocks and ETFs right from an app. It’s also possible to buy fractional shares, which are partial shares of a stock.

•   Robo advisor platforms. These newer services offer automated investment portfolios that typically consist of low-cost equity and fixed-income ETFs. Robo advisor platforms don’t offer advice, but can help investors manage a portfolio over time.

•   A full-service brokerage firm: The third option for buying shares is to use a full-service brokerage firm. These firms tend to offer expanded services, such as a designated advisor, broker, or wealth management advisor. Naturally, these services tend to come with associated costs, which means it might not be right for an investor who wants to buy just their first few shares.

Once an investor has made a decision, the share-buying process can be relatively seamless. Most accounts can be opened entirely online.

During the application process, investors will need to provide information like their Social Security number, dates of birth, and address. Additionally, it may be required for investors to answer some questions about their current financial situation.

Step Four: Fund Your Account With Cash

The next step in buying shares is to fund the account with cash. Depending on the institution, investors may be able to set up a link to an existing checking or savings account.

Setting up an electronic funds transfer (EFT) with a current bank account will likely be the fastest way to fund the account. If an investor is unable to set up an EFT or other automatic link to their checking account, it may be possible to mail a physical check directly to the investment institution.

Another funding option is to sign up for an automated monthly transfer. In this way, money is invested regularly (without the need to remember to do so).

It may take a few days for any cash transfer to be complete.

Step Five: Place a Trade

Assuming an investor is logged into their new account (and it’s already funded with cash), it’s possible to navigate to the area of the dashboard that says either buy, sell, or trade.

Here, investors can indicate what they would like to buy and specify how many shares, using the ticker symbol (a short abbreviation for each stock or fund name).

If buying a stock or an ETF, investors also need to indicate the order type. Both stocks and ETFs trade on an exchange, like the New York Stock Exchange or the Nasdaq. On these exchanges, prices fluctuate throughout the day. Mutual funds do not trade on an open exchange and their value is calculated once per day.

There are many different types of orders. During that first share purchase, new investors may want to stick to the basics: either a market order or a limit order.

•   A market order will go through as soon as possible. The order can fill quickly, but it may not be instantaneous. Therefore, the price could change slightly from the original quote. If an investor places a market order, they may want to have a slight cash cushion to protect from any erratic changes in price. If placing a market order while the market is closed, the order is typically filled at the market’s open, at whatever the prevailing price per share is at that time.

•   A limit order, however, focuses on pricing precision. With a buy limit order or a sell limit order, investors name the parameters for the order. For example, an investor could say that they only want to purchase a stock if it falls below $70 per share. Therefore, the order is placed if the stock falls below $70 per share. This means it’s possible a limit order won’t get filled (if it doesn’t reach the investor’s pre-selected price parameters).

A limit order may be more appealing to a trader, while a long-term investor may gravitate toward a market order. The benefit of a market order is that it allows an investor to get started right away.
Another step is to review during this process is the actual share order. Once the trade is then executed, voila — the investor now officially owns the share (or shares).

The Takeaway

These days, it’s relatively easy to get started as a stock investor. You can buy shares of company stock directly on a stock exchange. It’s also possible to invest in many shares of stock at once via a mutual fund or ETF (or a robo advisor platform, which provides a low-cost automated investment portfolio).

A more recent innovation is the emergence of fractional shares, which enable investors to buy a percentage of a single share of stock.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).