Tuesday, 24 November 2020

How to Buy and Sell Stocks

How to Buy and Sell Stocks
07 Dec
3:09

Maybe you haven’t invested in stocks yet. Maybe you have a 401(k) or IRA. Perhaps you have a micro-investing app with steadily increasing gains. No matter where you are in your investing journey, the process of how to buy stock and how to manage your own portfolio can seem daunting.

While there’s definitely a learning curve when it comes to investing, it’s never been easier to buy your first stock. Robo-advisors, micro-investments, and simple web platforms that allow you to buy, trade and sell stocks on your phone have made investing in the stock market effortless.

Why invest in the stock market?

Just because it’s easy to buy and sell stocks doesn’t mean the process is a no-brainer. First, it’s important to understand why you want to invest in the stock market. Why buy stock as opposed to, say, putting your hard-earned money in a savings account? The answer is that unlike other options, such as savings or bonds, stock shares likely have higher potential returns than stocks or bonds. But of course, with high returns comes risk: The volatility of the stock market means while you hope your investment gains value, there’s no guarantee it will do so.

Once you own stock shares, you literally own a small percentage of a company. If the company does well, not only does the stock gain in value, but you may receive what’s known as a dividend — a portion of the company’s earnings, usually paid on a quarterly basis. If the company continues to do well, the share continues to pay dividends, which a stockholder may reinvest in the stock market or withdraw as passive income.

Alternatively, a stock investor may decide to sell all or some shares of their stocks to maximize the gains they made. If the share price has increased in value, an investor can sell those stock shares at a profit.

A beginner’s guide to stocks

The concept of buying and selling stocks is simple. But, in reality, words and phrases like “ETF”, “blue chip”, “index” and “yield” may make you feel like you’re learning a foreign language. So how do you get started?

First, forget about stocks for a second and focus on your financial goals. While investing in the stock market can be a smart financial strategy, experts generally agree that it’s important to focus on paying down debt and establishing an emergency fund before investing extra cash. That’s because while stock returns on long-term investments can be good — the average annual return of the S&P has been around 10% since 1928 — interest rates on debt can be higher.

Once you feel comfortable with your finances, think ahead to your goals to decide on the right investment strategy for you and your family. Do you want to buy a house? Save for retirement? Have money set aside for a rainy day? These answers will affect how to buy and sell stocks, and what your stock portfolio may look like.

A portfolio represents the entire range of assets you own. You may buy shares or securities for specific companies, but it’s common — especially for beginner investors — to invest through a mutual fund, exchange-traded fund (ETF) or index fund. These funds can have any number of stocks, as well as commodities, real estate, foreign investments and bonds that are diversified to protect investors from potential risk. You may choose investment options that range from conservative to aggressive, with aggressive funds generally being chosen if you’re hoping for big gains — and are okay with potentially having a big loss.

While you can withdraw money in the stock market at any time, it’s often best to think of money you invest as relatively untouchable. That’s because it takes time for money to grow, and also because the nature of the stock market is to ebb and flow — if you withdraw all your investments as soon as you see share prices start to fall or your portfolio lose value, you may miss future gains.

Your goals, as well as your comfort with risk, will influence how you buy stock. Many beginner investors don’t buy stock alone: Research, investment advisors, robo-advisors, and portfolio recommendations can all come into play to help you come up with the best investing options for you. It may be that you want to actively monitor your stocks, or you may want to set a strategy and check in once or twice a year.

How to buy and sell stocks

If you’re looking to invest, there are several places to consider as you decide where to buy stocks, with pros and cons to each. It’s also important to note that it’s easier than ever to buy stocks online. That said, different platforms have different fees, limitations and considerations.

A traditional brokerage firm

A few decades ago, the only option to buy stock would be a brokerage firm. Even today, with plenty of online platforms to aid investors, brokerage firm can be a good option if you’re planning to invest in individual stocks. Major brokerage firms include TD Ameritrade, Edward Jones, Charles Schwab and Fidelity. In addition, many banks have brokerage services.

Some brokerages have a minimum amount required to open an account, and may charge fees for any buys, sales or trades. Brokerage firms also have stockbrokers on staff who can work with you to select stocks. A brokerage firm is an ideal option if you want to be hands-on with stock selection.

Online-only broker

Is there a way to avoid a fee for buys and trades? While the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) charge a fee for all stock sales orders regardless of brokerage, commission fees can range between brokerage options. Some traditional brokerage accounts have fee-free options for ETF sales or trades, and some online startups, like Robinhood, charge no commission fees for any stock buys, sells, and trades (though fees from third-parties may apply).

Some online-only brokers have the option of working over the phone with a live broker, which can be an option if you wish to buy and sell individual stocks. In general, being aware of any fees — regardless of which option you choose — is smart, since over time, fees can eat into your hard-earned capital.

A robo-advisor

In the past decade, robo-advisors have become popular for those interested in buying stocks online. These providers offer automated portfolio management. Algorithms, as well as the information you input regarding financial goals and risk tolerance, will create a customized portfolio.

Robo-advising services are offered by many traditional brokerages, but companies such as Betterment, Wealthfront, Wealthsimple and Ellevest are devoted to robo-advising. This can be a good option if you don’t wish to actively be involved in your investments, as these providers also tend to automatically recalibrate your portfolio if there’s any dramatic shift or change.

In general, robo-advisors specialize in algorithmically created portfolios and may not give you the option of buying individual stock. The fees may be lower than traditional brokerages, and may be based on a percentage of your overall portfolio.

A micro-investing platform

These providers take small amounts of money — in some cases, just a few pennies — and invest in ETFs and mutual funds. Micro-investing platforms may be exclusively on an app, and can be a good way to dip your toe into the stock market without a big commitment.

Acorns, Clink, and Stash are three examples of robo-advisors that have micro-investment options. These investment options — which tend to charge a monthly fee of around $1 — can be a good way to watch your money grow, but depending on fees, it may make sense to move the money gained in these accounts into another investment vehicle that offers more robust services. That’s because some micro-investing platforms switch from a flat monthly fee to a fee-based percentage once the account reaches a certain threshold, and it may make more sense to compare fees and choose a lower-fee account once your account reaches that point.

Choose your investment strategy carefully

Your investment portfolio is personal, and while there’s no “right” or “wrong” reason to buy a stock, there are some general best practices. Like so many skills, one of the best ways to learn how to invest is to learn by doing. Brokerages and robo-advisors, in addition to sites like MagnifyMoney, are great for learning common terms and strategies. But you can simultaneously learn and invest, and robo-advisors, brokers and financial planners can give you options for the type of portfolio that makes sense to you based on your financial goals.

For example, a retirement portfolio may look different than a portfolio meant to help you buy a house in the next five years because of the way assets are allocated. Aggressive assets have a bigger risk of loss but potentially bigger rewards; conservative assets may have the lowest risk and lowest potential of return. A customized portfolio will contain some of each in the attempt to help you reach your goal with as much money as possible.

A huge differentiation for new investors to realize is that investing in a portfolio through a robo-advisor or brokerage is very different than, say, actively buying and selling individual stock in the hopes of maximizing return. For example, investing in cryptocurrencies, initial public offerings (IPOs) and even individual stocks is very different than investing in a diversified portfolio meant to grow your money over the long term.

If you do wish to choose individual stocks, it’s smart to research a company and look at their quarterly or annual financial report with an eye toward positive cash flow. You may also wish to invest in stocks simply because you like the company and its mission, you’ve seen a proven track record of the company’s success, or it’s a company that you’ve followed over the years. That said, investing a small amount and watching the performance of the stock can help you suss out a strategy or make a decision whether you’d like to buy more.

How to buy stock today

You’ve done your research, opened a brokerage account and are ready to make your first stock investment. Once you’ve decided what stock to buy and how much money you want to invest, the next step to buying stock is to figure out how many shares to purchase.

Instead of focusing on shares, one common strategy for investors is to use is called “dollar cost averaging.” This strategy focuses on buying shares based on the money you wish to invest, not the number of shares you want. To use dollar cost averaging, simply purchase the same dollar amount of stock at regular intervals. For example, if you wish to buy $100 of stock and Company X is trading at $10 a share, you can buy 10 shares this month. Next month, when Company X is trading at $12.50, you can afford just 8 shares.

This strategy can help can help mitigate risk, since you purchase more shares when prices are low and fewer shares when costs are high. New investors can also learn to ride the ups and downs of the stock market by sticking to a strict budget and purchase schedule.

No matter what investment strategy you choose, the purchase experience varies across platforms. In general, you may be prompted to opt for a market order — which means the stock will be purchased at current market price — or a limit order, which allows you to name a target price at which the shares will be bought. It’s also important to be aware of any fees or commissions that may come from the purchase, and be aware of any limitations on purchases — some brokerage accounts have a cap on the number of buys, sells or trades made in a day.

While it’s smart to research the company you wish to invest in, it’s important not to get overly bogged down on any “best day of the week to buy stock” advice. If you’re planning to invest for the long term, it doesn’t really matter if the stock you buy is slightly lower a day or two after you’ve bought it; what matters most is long-term patterns and movement.

When to sell stock

Is it ever a good idea to sell stock? That depends. In general, money in a retirement account like a 401(k) or a Roth IRA has penalties and tax implications for withdrawals before a certain age, so many financial advisors would suggest those portfolios are left untouched.

But what if you opened a brokerage account or have bought individual stocks? There’s no wrong reason to sell stock — for example, you may need that money to be liquid for an emergency fund or an unexpected bill. Other reasons to sell stocks include diversifying your portfolio, moving away from a company with haphazard performance results, or simply feeling like the time is “right.” Some investors sell stock when the price has appreciated rapidly, using the money to invest in a less expensive stock. Other investors look closely at the valuation of the company. Working with a personal investment advisor can help you figure out smart strategies to sell stock, and your own experiences and research can help you become more familiar with common points at which investors consider selling stock.

In general, it’s usually not a good idea to sell stocks based on emotion alone — seeing a stock dip may make you nervous, but it could be smart to ride out an initial dip or look for larger trends over time.

How do you sell a stock when you’re ready? Platforms vary, but in order to sell a stock, an investor triggers what’s called a sell order. A sell order can be a market order (the stock is sold right now), a limit order (a seller names the minimum price they’ll accept), or a stop order (the sale will be stopped when the stock dips beyond a price limit) Again, it’s smart to be aware of any sale fees or limits within your investment platform.

Investing is an art and a science

There’s no limit to the number of investment strategies, tips and techniques you can try, but one of the best ways to learn to invest is to simply practice. With so many platforms offering investment opportunities for the cost of a latte, it’s never been easier to buy stocks. Keeping track of your long-term investment goals, your capacity for risk, and making sure you’re never investing more than you can afford to lose can help grow your money — and your confidence.

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Anna Davies

Anna Davies |

Anna Davies is a writer at MagnifyMoney. You can email Anna here

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