A Guide to Buying Stocks for Your Portfolio

FT Contributor
A man looking nervous at his desk, which contains 3 computer screens, while buying stocks.

The stock market provides people with opportunities to increase their wealth. Brokerages make it possible for individual investors to purchase stocks conveniently. While novices and amateur investors can access the stock market, they first need to understand the process of buying shares and the methods or strategies for choosing a stock that has good odds of increasing in value.

Whether you plan to purchase stocks for a short period or as a long-term investment, the goal is the same: sell the stock for a higher price than you paid for it.

Table of Contents

Find a Stock Broker

Investors have different options for purchasing stocks. Though it is possible, in some cases, to buy stock directly from a company, in most cases you order your shares through a broker.

You have three types of service providers to choose from when purchasing stocks: an online broker, a discount broker, and a traditional full-service brokerage.

Use an Online Stock Broker

Today, many people trade stocks online. Both professional investors and amateurs use online brokerages to buy and sell shares.

Online brokers make it easy and affordable for individuals to purchase stocks. With an online broker, you can buy shares for a lower fee compared to a traditional broker. The development of this type of internet investment platform has opened up stock trading to people who cannot afford the fees and minimum investments that many full-service brokers require.

When you sign up for an account with an online broker, you need to make an initial deposit. The amount of this deposit varies from broker to broker. Additionally, some brokers charge a small fee when you purchase stocks. Others do not charge a fee at all, and some waive fees if you meet specific criteria, such as maintaining a balance, making a certain number of trades each year or quarter, or making purchases at a particular time.

All online stock brokers perform the same transaction when you purchase a stock. They take the information about the price and number of shares and transmit it to a stock exchange. Stock exchanges exist all over the world, but major ones in the U.S. include the New York Stock Exchange and NASDAQ. The exchange performs the actual transaction. After the purchase, the information about the stocks you now own appears on your online brokerage account page.

Most novice investors make decisions about which online brokerage to choose based on fees, account minimums, and activity requirements. You want a broker that has a good reputation, online research tools, and customer service options should you need to ask questions.

Some online brokers do offer advice and guidance like a full-service broker, but they often charge extra for financial advice or broker-assisted trades.

Discount Brokers

Discount brokers are online brokers who offer limited services. While online brokers may provide other types of accounts, research tools, and broker-assisted trades, discount brokers only transmit stock order data to the exchange. They do not offer any additional services. Though they may provide technical support related to the use of their website, they do not have many research tools, and they do not offer any financial advice or broker-assisted trades.

Discount brokers charge fewer fees and have fewer requirements for opening accounts. Investors who do not need extra services or research tools can save money by opting for a discount broker.

The advantage of discount brokers for novice investors is that they provide a cheap and straightforward way to enter the markets. The disadvantage, on the other hand, is that novices who need extra support or advice will not be able to get it through a discount broker.

Full-Service Brokers

Full-service brokers handle the stock-buying process for their clients. They will also advise clients about which stocks to purchase and oversee the timing of the purchase. A full-service broker can also provide financial advice services such as creating an investment portfolio or planning and executing an investment strategy tailored for each client’s goals.

Another advantage of full-service brokers is that they can sometimes offer access to funds and other investments that are not available to independent retail investors. For example, they can provide access to initial public offerings (IPOs), preferred stocks, and various forms of derivatives that aren’t available from online or discount brokers. Furthermore, full-service brokers usually have a physical office where you can go to receive support and talk with advisors face-to-face. Other brokers do not have this level of service.

These extra services could be attractive to novice investors who are not sure about which stocks to purchase. Additional services come at an additional cost, however. Full-service brokers may charge higher fees for each trade, they may take a percentage of profits, or they could earn commissions by selling investments.

Figure Out What Stocks to Buy

Regardless of your broker choices, you need to have a well-defined strategy or method for choosing which stocks to purchase. Of course, you want to buy shares that will increase in value in the future. Unfortunately, it is usually not obvious which stocks will do so.

Because of this uncertainty, it can be a good idea to purchase different stocks in different industries rather than betting all your money on one company or one sector. If you diversify, then when a single stock loses value, your overall portfolio will not be affected as much.

Investors can rely on exchange-traded index funds or stocks such as utility stocks that generally provide long term growth.

You can also perform a fundamental analysis of a company by looking at their financial data. A full-service broker will provide this data, and you can usually access some data via an online broker’s website as well.

You can also consider a specific approach. For example, some of the most successful investors, including Warren Buffett, use a strategy called “value investing” to purchase underpriced stocks with the expectation that they will increase in value in the future. You can choose this or another strategy and learn the methodology for selecting stocks. The only rule for choosing a plan and learning how to invest with it is that it should fit with your investment goals and risk tolerance.

Decide On an Order Type

After you have chosen a broker and used research and your chosen methodology to select a stock, it is time to make a purchase. There is one more thing to consider before you buy. When you purchase a stock, you have to choose from two options: limit orders and market orders. Each option has advantages and disadvantages.

Limit Order

With a limit order, you name the price you want to pay for a stock. If the market rises or lowers to your asking price, then the transaction gets accepted. However, if the market stays above or below your price, then your order will not get filled, and you will not get the stock.

The advantage of a limit order is that you do not have to pay more than you want. In most cases, stocks have a spread between the buying and selling price (called the bid and ask spread). With a market order, you accept this difference, but with a limit order, you do not have to pay it. The disadvantage is that there is no guarantee that your order will get filled by the exchange.

Market Order

With a market order, you instantly purchase the stock at whatever the market price is at the moment that you click “buy.” If you want to buy a stock quickly without having to wait, you use a market order. You may have to pay a bit more than with the limit order because you accept the bid-ask spread. However, the reward for paying this spread is that you get the stock instantly.

How to Buy Stock Directly

In some cases, you can purchase stock directly from a company. You can save on brokerage fees by buying direct. However, some online and discount brokers do not charge fees as long as you meet specific criteria. In these cases, you will not save any extra money with a direct purchase. You can also purchase stocks that offer dividends, which are quarterly payouts directly from the company. Here are some of the most prominent examples.

  • 3M.
  • Sherwin Williams.
  • Kellogg.
  • ExxonMobil.
  • Johnson and Johnson.
  • Aflac.

Other direct stock purchase opportunities are available from

  • McDonald’s.
  • General Mills.
  • Motorola.
  • General Electric.
  • Caterpillar.
  • Pfizer.

Thanks to the variety of broker options, stock choosing methodologies, and order possibilities, you can tailor a complete investment plan based on your needs and investment style.

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