How to Buy Stock: A Step-by-Step Guide

A stock is a share of ownership in a company. Theoretically, individuals may buy stock in a publicly traded company as long as they have access to an investment account.

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

Read on to learn more about how to buy stock.

Where Can I Purchase Stock?

Individuals can purchase stocks through a brokerage account or a retirement account like an individual retirement account (IRA). You can set up an account at a full-service brokerage firm, which offers a variety of financial services including investment advisors; a discount brokerage that has fewer services and charges lower fees than a full-service brokerage; and an online brokerage that offers online trading and may charge even lower (or no) fees.

Once you choose the type of brokerage you want, set up an account, and fund it (typically, by transferring money into it from your bank account), you can begin buying stocks, including trading stocks online.

When choosing a brokerage, investors can compare the different options to help decide which one will best fit their needs. They can check into the investment fees brokerages may charge, such as maintenance fees, transaction fees, and commissions. Also, it’s wise to find out if there’s a minimum balance to start buying stocks. At some online brokerages, investors can get started with as little as $1 to $5.

How Do You Buy Stocks in 5 Steps?

There are generally five basic steps to buying stocks from start to finish. Here’s what they involve.

Step One: Think About What You Want to Buy

To start, investors may want to decide whether they’re interested in buying full shares of individual stocks, fractional shares of a stock, or investing in a fund, such as a mutual fund or exchange-traded fund (ETF).

Individual Stocks

A stock represents a share of ownership in a publicly traded company. Many companies offer both common and preferred stock.

•   Preferred stock generally does not come with voting rights, but dividend payments on these shares are prioritized over common stock dividend payments.

•   Common stock comes with voting rights. These shares may be more volatile, but might provide higher long-term returns. Common stock only pays dividends after preferred stock dividends are paid.

Stocks may provide a return on investment in two ways. The first is through potential price appreciation (though this is never guaranteed). The second is through dividend payments to shareholders, if applicable.

Ideally, shareholders may be able to benefit from a company’s share value increasing over time, as the company’s earnings and market presence expand. However, it’s very difficult to predict which stocks — and which businesses — will be successful in the future.

Individual stocks may be volatile and riskier than other types of investments, such as diversified index funds like the S&P 500 — although they may also provide the potential for higher rewards.

Fractional Shares

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 also buy them, assuming their brokerage offers them.

Owning a fractional share of a stock allows investors to realize gains, losses, and even dividend payments proportional to the fractional ownership amount.

One reason an investor might choose fractional shares investing is to manage cost. Shares of certain companies can be expensive. For example a share of stock of a company worth $1,000 might be available to investors as a fractional share for $100 (a 0.1% share).

Funds

A fund, whether it’s an ETF or a mutual fund, might be thought of as a bundle of investments. Often, these funds invest in stocks, but they may also hold bonds, real estate, or cash. For example, it’s possible to buy an S&P 500 mutual fund or ETF that holds the stocks of the top 500 publicly traded companies in the U.S.

An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered less risky than owning individual stocks because funds generally offer broad market exposure and may help an investor diversify their portfolio. However, as with all investments, there is risk involved in investing in funds. Diversification doesn’t guarantee profits and it’s possible to lose money.

Step Two: Determine What Type of Account to Open

The next decision for an investor is whether to open a brokerage account or a retirement account.

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.

•   Brokerage accounts allow investors to buy and sell securities. They are typically taxable accounts. There are no contribution limits or withdrawal penalties with brokerage accounts.

•   Retirement accounts are tax-advantaged accounts that can hold investments and savings. Tax-deferred accounts (like traditional IRAs) typically defer taxes on investment gains until retirement. With after-tax accounts, like Roth IRAs, qualified withdrawals are tax-free in retirement. However, retirement accounts have annual contribution limits as well as strict withdrawal rules.

Investors may choose to open a brokerage account if they’re already covered by a retirement plan through work like a 401(k). If they opt for a retirement account, investors could open a Roth IRA or a traditional IRA, or a SEP IRA if they’re self-employed.

Recommended: Understanding Dollar-Cost Averaging

Step Three: Decide Where to Open an Account

When it comes to deciding where to open an account, investors have plenty of options, including these:

•   Discount 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, but these fees tend to be much lower than those charged by full-service brokerage firms.

•   Online trading platform: Another popular option is to use an online investment platform, where investors can buy shares of stocks and ETFs right from an app. Online trading platforms may offer low or no fees. These days, there is a great deal of overlap between discount and online brokerages, as the former moves increasingly online.

•   Robo-advisor platforms. These services offer automated investment portfolios that typically consist of low-cost ETFs or index funds rather than individual stocks. Robo-advisor platforms may help investors manage a portfolio over time through automated asset allocation and portfolio rebalancing.

•   Full-service brokerage firm: These firms tend to offer expanded services, such as advisors, brokers, and wealth management advisors who can help individuals execute trades, monitor their investments, and more. These services tend to come with much higher costs.

Once an investor has chosen a brokerage or platform, they can typically open an account online by providing information like their Social Security number, date of birth, address, and employment details.

Step Four: Fund Your Account With Cash

The next step in buying stock is to fund the account with cash. Depending on the institution, investors may be able to set up a link to an existing bank account to deposit money into their investment account.

Investors may also be able to sign up for an automated monthly transfer. In this way, money is deposited in the investment account regularly (without the need to remember to do so).

Another funding option is to use a brokerage’s cash management account, which usually offer a combination of checking and savings account features, and are linked to investment accounts.

Step Five: Place a Trade to Purchase Stock

Once the account is funded, an investor can navigate to the area of the dashboard or app that says either buy, sell, or trade.

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

If buying a stock or an ETF, investors may also need to indicate the order type, though the default is typically a market order — an instruction to buy or sell immediately at the best available current price. 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.

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Understanding Market vs Limit Orders

There are different stock market order types. When purchasing stock, new investors may want to stick to the basics: either a market order or a limit order.

•   A market order will be executed as soon as possible, at the best available price. 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 focuses on pricing precision. With a 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, but it also means the investor won’t pay more than they planned to.

Finally, an investor can execute the trade by pressing the “buy” button. Once the trade is executed, the investor then owns the stock.

The Takeaway

With today’s evolving technology, it’s relatively easy for individuals to buy stock. They might open an investment account at a brokerage or online platform of their choice, for example, and buy shares of company stock directly on a stock exchange.

Investors may also choose to buy a bundle of stocks or other assets through a mutual fund or ETF, or invest in fractional shares, in which they buy a percentage of a single share of stock. Each investor can determine what investments make the most sense for their specific financial situation and goals.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What is the minimum amount of money needed to buy stock?

An investor can often start buying stocks with very little money. Some brokerages allow individuals to begin investing, with as little as $1 to 5, for example. Many brokerage platforms also offer fractional investing that may allow investors to buy fractions of a share of stock for just a few dollars, depending on the price of the stock.

How do I buy stocks without a broker?

You can buy stocks without a traditional broker through an online trading platform. To do this, you could set up an investment account with a brick and mortar financial services firm, discount broker, or an online brokerage. Once you set up your account and fund it, you could start researching and buying stocks. If you wish to buy stocks directly on your own, you may explore direct stock plans or dividend reinvestment plans (DRIPs) offered by some companies.

How do you make money from owning stocks?

You have the potential to make money from owning stocks if you’re able to sell them for a higher price than you bought them for, though price appreciation is never guaranteed and it’s possible prices may decline instead. You may also make money from owning stocks if the company pays dividends, which is when a company periodically distributes a portion of their net earnings to shareholders. However, not all companies pay dividends.

Are there fees associated with purchasing stock?

There may be fees involved with purchasing stock, such as commission, transaction, and maintenance fees, depending on the type of brokerage or investment platform an investor uses. Full-service brokerage firms typically charge the highest fees, while discount brokerages usually charge less, and some online brokers have low or no fees.

Do you have to pay taxes on your stock investments?

When you sell a stock in a taxable brokerage account and make a profit on it, those earnings are generally subject to capital gains tax. The rate at which you’re taxed depends on how long you held the stock before selling it. Typically, if you held the stock for a year or less (short-term), you will be taxed at your ordinary income tax rate. If you held the stock longer than a year (long-term), you’ll be taxed at a rate ranging from 0%, 15%, or 20%, depending on your taxable income and filing status. Dividends from a stock are also generally taxable.

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