My parents traded stocks and options for a while when I was a kid, so my impression of investing involved a lot of candlestick charts, greek letters, and graphs I had no hope of interpreting. It was all very mystical, unreachable, and unknowable to my little 12-year-old mind.
Ironically, the thing that pushed me into investing was a simple savings account. My bank gave me %.01 interest on my funds, which translated to a few measly cents a year.
Whoopie. I could’ve gotten more from my couch cushions.
With as hard as I was working to save money, it hardly seemed fair that my bank wasn’t paying me enough to keep up with inflation.
I knew I needed to learn more about investing if my money was actually going to go to work for me. I started off listening to podcasts, reading books and blogs, and I finally took the leap two years ago and downloaded an investing app—the best thing I ever did for my savings.
If you’ve ever wanted to invest in stocks but been too embarrassed to ask how to do it, this article is for you.
We’ll demystify the process of buying stocks, explain the terms you need to know to get started and give you a few tools to help you sift the good stocks from the bad ones.
What is a Stock?
Stocks (also referred to as equities) are fractions of ownership in a company. Those fractions are called shares. So technically, when you own one share of stock, you own a tiny part of that company. (You can go to shareholder meetings and everything!)
Stocks are bought and sold on an exchange (a.k.a. stock market). In the US, this is the New York Stock Exchange (NYSE), but other countries have their own exchanges. Think of them as the modern versions of the markets and bazaars of the old days, where people were shouting about the wares they had for sales and their prices.
A few decades ago, the NYSE wasn’t all that different, with stockbrokers bustling about trying to match sellers and buyers of stocks.
These days, the haggling over prices and the matching of buyers and sellers take place electronically. Retail investors like you and me can get in on the action by connecting to a brokerage account, which is like a bank account that can hold stocks and ETFs, as well as plain cash.
Why Buy Stocks?
There are many options for investing — stocks, bonds, real estate, gold, and more. Stocks are some of the most common investments and the most accessible to the average person. Let’s see what makes stocks a great place to invest your cash.
While the value of individual stocks rises and falls on a daily basis, the value of the stock market as a whole has increased over time.
This increase in value is known as appreciation, which is perhaps the most compelling reason to own a stock (or any investment for that matter). You anticipate that your investment will be worth more over time.
To illustrate this, the Pinterest stock I bought a year ago on my Webull app for $26.51 has appreciated to $80.18 at the time of this writing. That appreciation has made me $53.67, just for owning the stock. Not bad for a few taps on my phone and the cost of two months’ worth of Netflix.
Certain stocks split a portion of their net profits with shareholders (that’s you!). They issue these as cash payments or additional shares of stock, which are called dividends. Dividends can be paid monthly, quarterly, or annually, and they’re paid on a per-share basis.
Dividend payments stack on top of appreciation, increasing your profit potential. Think of it like owning a rental property. The value of the house and land goes up in value over time (appreciation), but you also collect rent periodically (dividends). (In real estate there is generally more income from the periodic payments of rent than from appreciation, but you get the idea.)
Companies that issue dividends are generally large, well-established ones with consistent profits. Common industries with dividend stocks are banking, healthcare, and utilities.
As a shareholder, you have the option to take the cash payment or reinvest the dividend into the stock, buying you more shares. Reinvesting dividends is a cheap, easy, effortless way to increase your investments over time.
Millions of people buy and sell stocks every minute of every business day, making stocks a very liquid (easy to turn into cash) asset. The odds of you finding someone to sell you the stock you want or finding a buyer for the shares you hold are very high.
This is a huge advantage for investing because you can get in without a big barrier of time or money. Heck, you can download a brokerage app like Robinhood and buy stocks in your pajamas!
You can also sell your stocks quickly if you need the cash, which is harder to do in assets like real estate.
Which Stocks Should I Buy?
Okay, okay. I’ve convinced you that stocks are a good place to invest your dough. But there are hundreds of stocks to choose from in dozens of industries. How do you pick the good ones?
First, A Word of Warning
Before we get much further, I want to put up a warning: investing in stocks involves risk and a fair amount of it. Stocks can and do go to zero dollars in value. Just ask J. C. Penney.
If you are investing money you know you’ll need like an emergency fund or a retirement account, don’t invest in individual stocks unless you know what you’re doing (i.e., read a lot more articles than just this one). A better bet is to invest in a group of stocks like an ETF or mutual fund so you don’t put all your eggs in one basket.
If you’re investing with money you hope to get a return on but can ultimately afford to lose without risking your livelihood, read on.
How to Evaluate Stocks
Despite what you may have heard, picking stocks takes more finesse than pursuing “hot tips” or just guessing. There are some real ways to sift the wheat from the chaff and sort out which stocks have true potential. Here is a basic (and totally NOT comprehensive) list of things to research before buying a stock.
- Price-to-Book Ratio (P/B). The price-to-book ratio compares the stock price against how much the company would be worth if it were broken down and all its assets sold. This can be a helpful indicator when normally healthy companies stumble, like gym chains or airlines in a pandemic, for instance. A strong P/B may signal a great value buy: a company that is temporarily down on its luck but has good future potential.
- Earnings per Share (EPS). If the company were liquidated (as in the hypothetical scenario above), the EPS tells you how much each of your shares would be worth.
- Price-to-Earnings Ratio (P/E). This compares a stock against its current earnings and is one of the most widely used indicators of whether or not a stock’s price is justified. If a stock price soars but has a lackluster P/E, that spike will likely be a temporary one.
- Price-to-Earnings Growth (PEG). This tracks how the P/E has grown over time. If ABC Company has one stellar quarter or year, the P/E alone might make it look like a strong buy. However, if this is the first profitable year in the last 10, it may give you pause.
- Debt-to-Equity Ratio (D/E). Just like people, companies can get into a precarious position if they take on too much debt. A high D/E ratio can indicate that the company is overextended, relying too heavily on borrowing for their operations.
These are only a handful of commonly used indicators to evaluate a stock, and none of them should be used in a vacuum. Similarly, your doctor checks your heart, lungs, throat, blood pressure, etc. to determine your overall health. Just because you have a cough today doesn’t mean you’ll keel over tomorrow, but multiple problems in multiple areas can indicate poor health.
The same goes for the health of companies. Take all these ratios together to get a more accurate, holistic picture of a company’s value.
How to Buy a Stock
Once you’ve done your research and picked out a few stocks that are worthy of a spot in your portfolio, it’s time to buy. Here are the steps to take to set your money growing in the stock market.
1 – Sign Up for a Brokerage Account
Create an account with the broker, then link it to your bank account to transfer the funds. The broker will ask for all your personal info (mailing address, SSN, etc.), and may pull your credit, depending on the institution.
You can choose a traditional broker (Charles Schwab, TD Ameritrade, etc.), and you’ll have access to a wealth of charts, graphs, and tools to help you evaluate stocks. For the beginner, however, this firehose of information can be more overwhelming than useful.
When I started out, I used the Webull app. I’ll admit this was mainly because of the free stock they offered with sign-up, but I love that the app gives you enough information to be useful without making me feel saturated with more stats and data than I could make sense of.
If you’re a beginner, I recommend opting for a brokerage app like Webull, M1 Finance, or Robinhood to get started. Stock trades are free, and each one comes with educational and analytical tools to help you along.
2 – Fund the Account
To buy stocks, you’ll need to fund your brokerage account with cash from a checking or savings account at another institution. Some accounts have minimums, but most apps don’t have them. (I started investing on Webull with $100.)
Your brokerage app or website will have instructions on how to link your account so you can deposit money whenever you’re ready to invest.
3 – Place an Order
When your funds have landed in your brokerage account and you’ve selected the stock you want to buy, you place an order for that stock.Buying stocks involves more haggling than transactions at the supermarket—even though this haggling happens behind the scenes, done by robots.Keep this in mind as we explore different ways to order shares of stock.
Types of Orders
Market: A market order tells the market “I’m good with paying the going rate for this stock. I’m not going to fret if the price is a few pennies off from what I thought — just buy/sell this stock as soon as possible.” The market will match your order with the next available buyer/seller.
Limit: If you have a specific price you want to pay for a stock, choose a limit order. This only executes if the stock price hits your predetermined limit or better during that trading day. If your stock doesn’t hit that price, the order is not executed.
Good ‘til Canceled: If you want to place a limit order that lasts longer than one trading day, choose a good ‘til canceled (GTC) order. This is basically a limit order with a longer expiration time. You can set the GTC order to expire between 30-90 days.
Stock Market Myths
Once you’ve dipped your toe into investing in stocks, you’ll start to hear advice from everyone. Cautionary tales and hot tips will start coming out of the woodworks. Discerning between fact and legend can be tricky, so we’ve debunked a few stock market myths for you here.
Myth #1: You need a lot of money to invest in stocks.
I started with $100 on Webull and added to my stash as I could. There are plenty of great stocks for under $100 a share (PINS, ZNGA, and ELY are a few I hold).
Many brokerage accounts also allow you to hold fractional shares (small pieces of shares) so you can invest in big-ticket stocks like AMZN and TSLA without forking over hundreds of dollars.
(If you don’t have much money to invest, consider starting with an ETF so you don’t have all your investing money tied up in one stock.)
Consistently adding to your investments (rather than huge windfalls) makes for long-term wealth.
Myth #2: The market always goes up.
This is kinda-sorta true. Over its lifetime, the stock market has gone up, giving investors a return of around 7% per year after adjusting for inflation. I started investing in 2019 when the S&P 500 was at 3,714, and even after the pandemic and the latest stock market tumble, it’s still up at 3,897 at the time of this writing.
But the historical average masks extreme losses and sky-high gains, and there are plenty of each. And just because the stock market as a whole goes up doesn’t mean an individual stock will.
Choosing individual stocks removes you from any assurance that “the market always goes up.” If you’re betting on the entire market, buy an ETF like VOO or VTI to take advantage of that upward trend.
Myth #3: You’ll Make a Lot of Money Daytrading Stocks
Daytrading is trying to jump in and out of the market quickly (usually entering and exiting trades within a day). It appears to be pretty awesome—make money buying and selling at the right times on the computer in your pajamas.
Multiple academic studies have shown that the vast majority of day traders lose money. So give yourself permission to step away from the computer screen and the emotional roller coaster of checking stock prices every day. It will be better for your mental wellbeing and your bottom line.
Buy a few quality stocks and let time and compound interest work their magic.
Myth #4: Follow the Industry Buzz, Media Stories, and/or Hot Tips to Find Winning Stocks
I totally fell for this one. I thought Pfizer was poised to rocket to the moon when they became the first company with an FDA-approved COVID-19 vaccine. I didn’t do any other investigating—why would I need to? The need for vaccines wasn’t going anywhere anytime soon.
I bought based on the buzz when the stock was riding high, but I quickly said goodbye to $9 per share (about 25% of the stock’s price at the time) after the novelty wore off and the stock dropped back down.
Don’t rely on hot tips — do your research and buy companies with sound fundamentals and growth potential.
If you’re looking to make your money grow, the stock market is a great place to do it. Historically, stocks have afforded investors consistent returns, dividends, and good liquidity.
Choosing quality stocks requires research and good judgment. If you don’t have the time or inclination to educate yourself on stock market analysis, that’s okay. That’s why ETFs and mutual funds are so popular.
But before you leap into investing in individual stocks, be sure to do your homework. Don’t buy based on media buzz or clickbait articles. Research which stocks are a good value by assessing their ratios of debt and earnings, and compare each one to the industry as a whole.
When you’re ready to dive into investing, sign up with the broker or investing app of your choice and watch your money grow!