What is a stock: How to buy stocks step by step

A stock or a share is a security that represents the ownership of a portion of a company, precisely a corporation. Owning a company’s stocks means owning a fraction of its assets and profits. The amount of ownership you have in a company will depend on the number of shares you have. The more shares you own, the higher the percentage of assets you can claim and the more earnings you make from the company’s profits.

There are many ways to buy stocks, but the easiest way to own stocks is through an online broker. Some of the best brokerage companies to buy stocks include but are not limited to Fidelity, Etrade, Charles Schwab, and Interactive Brokers. Buying stocks is great for beginners because you don’t need too much money. You can start investing in stock with as little as $1.

In this article, I will explain the basics of stocks, where to buy stocks, and the best ones.

How does investing in stocks work?

Investing in stocks involves purchasing a portion of ownership in a particular company. When you buy a share of stock, you’re buying a piece of that company, essentially becoming a shareholder. The market determines the price of a company’s stock, and it fluctuates based on supply and demand dynamics.

Before you can buy shares of a company, it must go public in an initial public offering(IPO). Companies issue stock to raise funds for business purposes like expansion or debt repayment. Once issued, these stocks can be bought and sold on various stock exchanges. As an investor, you can make money from stocks in two key ways.

• Capital gains. When you buy shares of a company, and its prices increase, you can sell it later for a profit.

• Dividend. Companies pay dividends to their shareholders, and a portion of the company’s profits is distributed to stockholders.

Investing in stocks comes with risks. If a company doesn’t perform well, you can lose a substantial part, if not all, of your investment. This is why you must do enough research and evaluate different factors, such as a company’s financial health, market position, and industry trends, before investing.

Types of Stocks

There are two kinds of stocks that you should know about, and they are listed below.

• Common Stocks. Common stocks represent ownership in a corporation, and owners can elect the board of directors and participate in the making of corporate policies. Common stocks yield a higher rate of return over time. Should the corporation go bankrupt, common stockholders may not receive anything. Bondholders and debtors must be paid in full before common stockholders get something.
• Preferred stocks. Preferred stocks give their holders higher dividends than common stocks. However, shareholders of preferred stocks have limited corporate voting rights. Preferred stockholders will have more asset rights if the corporation is liquidated. Although preferred stockholders have more dividends and are higher than common stockholders, their claim to assets will happen after bondholders and debtors are fully paid.

How to buy stocks?

Buying stocks is simple, but a small mistake can cost you your savings. Typically, you need to know what stocks to buy and which brokerage company to use, and then buy them. Check out this step-by-step guide to buying stocks.

1. Select a broker

Choose a broker that best meets your needs. It could be either an online broker or a traditional broker. Online brokers are preferable if you’re comfortable researching, trading, and managing your portfolio online. Traditional brokers are best suited for those who prefer face-to-face interaction and advice.

2. Open a brokerage account.

Once you’ve selected a broker, you must open a brokerage account. A brokerage account is what allows you to buy and sell stocks. This usually requires filling out an application form, either online or in person, where you’ll provide personal details for verification.

3. Fund your account

After accepting your application, fund your account by depositing money. You can do this via a bank transfer, writing a check, or setting up a direct deposit. The amount may depend on the broker’s requirements and your investment capacity.

4. Research the stocks you want to buy

Before buying shares of any company, thoroughly research your desired company to understand its performance, market trends, and future projections. Reading public companies’ financial ports, staying up to date with financial news, and doing self-paced basic learning about stocks.

4. Place your order

Once you’ve researched and decided which company shares you want to buy, buy the shares through your brokerage account. You’ll need to specify the number of shares and the price you’re willing to buy. Buying mutual and index funds is a great way to start if you are new to investing. If you want to buy individual stocks, try to buy large-cap stocks, as these are stable and experience less volatility.

6. Execute your order

After putting in all the details, such as the stock ticker and number of shares, our broker will execute the order on your behalf. Depending on the type of order and market conditions, the execution might be immediate or take some time.

7. Monitor your investment

After purchasing shares, monitor your investment regularly to monitor the company’s performance. This will help you decide when to hold, buy more, or sell your shares.

How do stocks make money?

There are many ways to make money with stocks. Common ways to make money with stocks include dividends and stock growth.

Making money through dividends. Dividends are a portion of a company’s profits shared with shareholders. If a company decides to distribute dividends, it can be a steady source of income for stock investors. However, not all companies pay dividends, especially those in growth or expansion phases. They would rather reinvest their profits into the business to fuel further growth.

Making money with capital gains. On the other hand, capital gains are a stock’s increased value over time. A stock investor buys shares at a certain price, expecting the price to rise. When the stock’s market price rises above the purchase price, the investor can sell these stocks to realize a profit. This is known as a capital gain.

What is the average return on stocks?

The average return on stocks varies widely depending on the timeframe and specific market conditions. The stocks you hold in your portfolio will also determine how much money you make investing in stocks.

However, historically, the average annual return from the S&P 500 (a popular benchmark for the U.S. stock market) from 1957 through the end of 2023 is approximately 10.26%, according to Investopedia. Please note that this figure is an average and includes periods of significant market volatility, with returns in any particular year potentially being much higher or lower.