How to Buy a Stock

by Amanda Harvey

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Introduction

Understanding how to buy a stock is a great basis for getting started in the exciting and lucrative world of stock and options trading. Buying a stock essentially means buying a share-holding in a publicly listed company, and this is often done through an exchange such as the New York Stock Exchange.  

Once an individual has bought stock in a company, their share-holding will increase or decrease in value according to the price that the company’s shares are trading at. This price is influenced by many factors, including internal dynamics such as the company’s performance, as well external conditions including changes in interest rates, and economic reports.


How to Buy a Stock Directly from a Company

Many large, blue-chip companies offer programs for direct investment. The investor buys and sells stocks directly through the company, thereby eliminating the need for a broker. An individual can research companies online, to ascertain which ones offer direct investments, and then select stocks in which to invest. The company will provide information on how to conduct the purchase, and it is generally a fairly simple process.

How to Buy a Stock through a Broker

Buying a stock on an exchange is generally conducted through a broker or an online brokerage company. A full-service broker is more along the lines of the traditional stock broker who takes and then places orders directly from their clients, and offers advice on which stocks to choose. This type of service is expensive, but for an individual with substantial capital to invest, and limited time, and/or knowledge and confidence in their own abilities to make good investment choices, using a full-service broker may be a viable option.

If you decide to pursue this method of buying stocks, your first step is to select a broker. Once you have done so, your broker will guide you in handling all the details of setting up accounts and managing capital, as well as actually buying stocks.

How to Buy a Stock through an Online Brokerage Service

For a potential investor who wishes to limit the expenses incurred by buying stocks, and has the time and desire to conduct their own research into which stocks to buy, using an online brokerage service is a good choice. There are a multitude of different services available, and it is important to consider the varying costs and features offered by different companies in order to select the one that best suits an individual’s requirements.

Once you have chosen a brokerage service, the next step is to set up an account, and the company should offer plenty of information on how to go about this through their website as well as providing customer support if required. After the account has been established, funds need to be deposited into the account, and this may be done by electronic transfer, or various other methods. When the account is open and the funds are available, you can move onto the most exciting and potentially rewarding part, which is actually buying stocks!

Using an Online Brokerage Service – Placing an Order

The culmination of learning how to buy a stock is actually placing the order and having the transaction executed. Placing an order involves submitting details of the company in which you want to buy shares, the number of shares you wish to purchase, and the price which you are willing to pay. Once the transaction has been completed, you will receive confirmation, which is an important piece of documentation for your records.

I Have Bought a Stock – Now What?

Once a potential investor knows how to buy a stock, they also need to understand what happens from that point on. A stock holder may sell their stock at any time, and ideally, this would be at a profit when the price of the stock has risen. Most people have heard the maxim, “buy low and sell high.” This is obviously a desirable situation when trading stocks but it is not always the case.

Sometimes an investor will sell at a price lower than what they initially paid for the stock. This is often because they have seen the price begin to drop sharply, and they anticipate that it will drop further, so they decide to cut their losses and avoid a potentially greater loss. On the other hand, a stock price that drops will usually, although not always, rise again at some point.

Many investors implement a buy and hold strategy which involves retaining a stock holding for an extended period of time – often years. This can be a good strategy, as many stocks will continue to rise, and selling shares at the first sign of increase can deprive the investor of much greater returns over a longer time.

As well as the potential gain that can be made by the increased value of a stock, the stock holder can also make money in the form of dividends. Dividends are a return on investment paid by the company to its investors, and the amount depends on the overall performance of the company. These dividends may be calculated yearly, quarterly, or even monthly, and are typically paid in cash. Many companies also offer a reinvestment plan, where dividends can be used to add extra shares to the investor’s stock holding, thereby compounding the interest.

Conclusion

Learning how to buy a stock includes gaining an understanding of the various methods available for, and aspects of, becoming a stock holder. This knowledge, combined with an awareness of how to manage your stocks once you have bought them, can set you on the road to a highly rewarding experience of investing in the stock market.


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