- An online brokerage service is a convenient way to purchase stocks without a traditional broker, and allows for even stock market newcomers to invest.
- Be aware that prices may shift between the time you place the order and when the order is executed. Stock purchases generally take two days to process.
- Diversifying your portfolio is a great way to maintain sustainable growth without risking everything in a single market or company.
The stock market can be a wild place. Fortunes are made, and lost, every single day, while many investors take the long view when it comes to investing in stocks. The U.S. stock market is the largest in the world, while overseas markets are also available to everyday investors. With access and some know-how, you can participate in this giant stock market, purchasing individual stocks or building a fleshed out portfolio. We’ll teach you the details involved in how to buy stock.
Can You Buy Stock Without a Broker?
In the days before the internet, buying stocks was a very physical activity. You went to a brokerage firm to set up your portfolio and discuss what you’d like to invest in. Then, they’d work directly with the stock exchange to pick stocks and invest for you. In short, you couldn’t go very far without a traditional broker. (In some cases you even needed a financial advisor to assist.)
Fortunately, we live in an age where you can get online and access the stock market in seconds. Even better, you can research, trade stocks or make a stock purchase through online brokerage sites like E-Trade, Schwab, or Robinhood.
So, can you buy stock without a broker? Yes, but your options are a limited. You can use a Direct Stock Purchase Plan to buy stocks directly from a corporation, but these plans aren’t offered by all companies.
You can also set up a dividend reinvestment plan, or DRIP. These allow you to set up regular purchases of an individual company’s stock using a stock transfer agent or DRIP agent. Again, this is more of a niche use option, as you’re constantly investing. If you have the funds to spare and you want a larger number of stock shares, this is something to speak to your financial advisor about.
Another option for how to buy stock without a broker is to buy mutual funds directly. This investment strategy typically involves groups of investors that gather their personal finances and invest in Wall Street, real estate, and so on. Many consider this a convenient way to own many types of investments in one fund, spreading risk. Mutual funds are also considered a wise way to invest on account of the shared risk versus individual risk of being a lone investor, although keep in mind that all investing strategies pose some risk.
If these three options aren’t appealing, then read on to learn how to buy stock.
Before You Buy
Let’s assume you have an account set up with any of the major online stock brokerage firms.
Once you have your online account set up, think about the following before proceeding with any stock purchases:
- Your Goals: Know what your goals are before you get started with investing. Do you want to build a long-term portfolio, to earn income through dividends, or are you looking for growth and perhaps short-term gains? A big mistake many new investors make is not having a plan or goal in mind, so doing this ahead of time will ensure you purchase the stocks that match your goals.
- The Risks: The stock market comes with risks that can be defined as uncertainty of the outcomes, or the volatility of the value of your investment, including the possibility of loss. Understand your own risk tolerance and how much you’re willing to let a stock price fluctuate. It’s easy to panic and sell stocks too soon, but it can also hurt you to wait to sell. It’s key to know the risks, know your tolerance, and have a grasp on market volatility.
- Trading Expenses: It’s easy to get swept up in the stock market once you start buying and selling. Keep an eye on your trading costs to ensure you’re not getting carried away.
How to Buy Stocks Online in 4 Steps
With those guiding best practices in mind, it’s time to get started with your journey into making money with stocks.
1. Find Stocks to Buy and Set Number of Shares
First things first, you need to determine which stocks you want to buy. Think about their place in your investment portfolio. Will these stocks offer aggressive short-term gain, which can be difficult to achieve, or will they be a part of a more sustainable long-term gain?
Once you have their place in your investment plan nailed down, look at their share price and allot the number you’d like to buy.
2. Choose Your Stock Order Type
Now that you know which stock you want and how many you’d like to purchase, you need to make the actual order. You have a few options here, the most common ones being:
- Market Order: A market order is the most common stock order type. This involves telling the broker (or the site you’re using) to buy the shares at the best available price during your order. Essentially, you can choose this option and feel confident you’re getting the price you saw at the time of your order (within a range), but if the market is volatile, it can also mean you might pay more or less than the price you expected.
- Limit Order: With a limit order, you place a set price you’re willing to pay. If you feel a stock is worth a certain price and not a penny more, this is the option for you. This means a limit of $5 per share will result in the stock only being purchased if it hits $5 or even lower. You won’t have any surprises or spend outside of your set budget. The downside is that it can take time for your order to be filled. (In some cases it may never be filled if the prices don’t ever dip.)
3. Wait for Confirmation of Stock Purchase
Unlike a shopping trip to the grocery store, stock purchases don’t go through immediately. Generally, you’ll be waiting roughly two days after your order is placed to see confirmation that your stocks are in your portfolio.
For example, let’s say you placed your market order for stocks in IDK Company on Monday after seeing them trade at $10 per share, and the order is filled at some point during the day when shares may have shifted to $10.03 per share. On Tuesday the order will be executed. Finally, on Wednesday the order is settled and you receive the stocks at the price of $10.03 per share, plus any trading fees. In short, the stock’s price may not be exactly what it was when you actually initiated the order.
To illustrate this further, reference the table below.
Day your order is placed and executed
Day your order is settled for your account
|You place an online market order for 100 shares of IDK stock. Stock trading at approx. $10 per share, but the market price hits $10.03 per share when your order is executed||Your account is charged for $1,003 (100 shares x $10.03), plus trading fees required by your broker.|
You become the shareholder of record for these shares of IDK stock at T+2, and the shares appear on your account.
It’s important to note that if you’re selling one stock to fund the purchase of another, the broker may place restrictions on the purchase to ensure the proper funds are available. This is due to the latency between the time you place the order of the stocks and when the order is actually settled.
4. Understand the Tax Implications of Stocks
All brokerage firms will report your earnings come tax time. If you receive cash dividends, or even stock dividends (fractional stock as a form of payment or compensation rather than cash), these will be counted as income. Similarly, any stocks sold that result in capital gains will result in taxes.
Timing is important. Stocks held more than one year are taxed at capital gains rates, which are generally more favorable and no more than 15% for most taxpayers. Stocks held less than one year that result in a gain will be taxed at ordinary income rates which can be higher than capital gains rates. If you sell stocks that gained you a huge chunk of profit, be prepared to have those factored into your taxes. If you sell stocks at a loss, you can offset the loss against other capital gains, or claim up to $3,000 per year against your earned income for that year up to 10 years. Consult with a tax adviser to figure out the best approach.
Build a Well-Rounded Portfolio
While your stock portfolio is exactly that — yours — it’s a good idea to consider diversifying your portfolio for the sake of managing your risk. Investing a large amount of money in one company or one type of stock can set you up for major heartache if the market crashes or that company goes under. Even investing in stocks from companies similar to a stock you’re already invested in can result in your portfolio being too narrow. A narrow but aggressive portfolio can result in quick gains in some cases, but can also result in huge losses over a short period of time.
If you’re wanting long-term sustainability and responsible growth, a well-diversified portfolio is a proven vehicle to wealth creation — and stocks are a cornerstone to this investment strategy. Long-term growth may not be as attractive or enticing as short-term, but when done early and consistently, it can result in a true nest egg down the road.
There are more stocks available than one can count, so speak with a financial advisor to learn how to buy stock and create a portfolio that’s right for you. If you don’t have a trusted advisor readily available, robo-advisors can also be helpful. It also never hurts to brush up on your general investing knowledge beforehand.
Your portfolio can become unlike any other out there. If you view stock research as a time to learn, it can even end up being fun. Before too long you’ll be well-versed in stocks, aware of how the market is doing, and most importantly, investing in your future. That’s something everyone should put stock in.