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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.
In order to invest in a stock, an investor just needs to create a free brokerage account, fund the account, and then place an order to purchase shares of a company. Most apps like Robinhood or M1 Finance let you do this in seconds, with zero fees.
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.
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.
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.
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 Stock 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.
Final Thoughts – How To Invest In A Stock
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 in, sign up with the broker or investing app of your choice and watch your money grow!