Who hasn't watched markets rally and thought about getting in and buying stocks? Maybe you've heard from some friends who made a few good bets and thought "I'd like to give that a try." How do you do it? While an education in buying and selling stocks can be a lifetime process, the initial startup is a matter of a few easy steps.
Do you need a broker? The short answer is no—you don't need a living, advice-giving, fee-charging broker (although you shouldn't rule them out). You do, however, need a brokerage—the online storefront where you purchase stocks, bonds, exchange-traded funds (ETFs), and other investments.
- You don't need to work with a stock broker to buy stocks. Online brokerages can do that for you.
- Online brokerages generally charge no fee for selling and buying stocks. Fee schedules may apply for options contracts and futures.
- Direct stock plans permit investors to buy shares from the issuing company. Those plans have lost appeal with the spread of free online trading.
Why do you need a brokerage, but not a broker? Basically, no education or license is required to buy a stock. Becoming a stockbroker—someone buying and selling on behalf of a client—is another story. That requires passing the Series 7 and Series 63 licensing exams.
To do it on your own, to become a so-called retail investor, will require pretty much just money and an internet connection. To be successful, to make money, or build a nest egg, that's where knowledge comes in. Before you start buying, read as much as you can on subjects like how to pick an online brokerage and tax implications. Perhaps most important, find out who you are as an investor—identify your goals, your risk tolerance, and how much time are you willing to spend on managing your investments.
What about a broker? With buying stocks being relatively cheap and simple, and banking apps like Acorns offering things like round-ups that encourage easy stock purchases, people might disregard the idea of ever using the services an expert broker. That may be a mistake, Shari Greco Reiches, co-founder of wealth management firm Rappaport Reiches Capital Management in Skokie, Illinois, said in an interview. The experts may make your money grow faster than you can, help you avoid costly mistakes, and be more than worth the expense, she says.
"An advisor can look at your overall situation, help you come up with a systematic plan," said Reiches, whose book Maximize Your Return on Life was published in June. "I believe strongly in financial advisors."
Another option exists that avoids the broker and the brokerage—buying directly from the company. Known as direct stock plans (you may know them as dividend reinvestment plans or DRIPs), these plans, managed by an intermediary, permit individuals to buy shares from participating companies. Direct stock plans' appeal has faded with the advent of online stock buying and because most online brokerages trade your stocks for free, Reiches said.
If you decide that you want to start trading, and going solo is your style, you'll begin by selecting your brokerage. Consulting a well-researched, expertly-written guide may be the best place to start. The biggest brokerages might be suitable for most people, although more niche investments like cryptocurrencies and futures may not be available to most investors.
And be careful with your passwords! Follow good password security protocol or use a password manager.
You have to fund your account. Do you want to send in a check for a one-time deposit as a way to discipline yourself, connect a bank account for easy transfers of cash, or set up regular deposits? Whatever you do, know yourself and your limitations. Maybe start small, and gradually work your way up as you gain experience.
Once you have your account set up and funded, the fun begins. Time to buy. But what to buy? The investing universe is broad, from stocks to bonds to ETFs to mutual funds and on to options and futures. If your knowledge base is narrow, consider starting with index funds. "You're much better off with an index fund than a stock" to get started, Reiches said.
Then, with a "click," you're an investor. And like planting a seed in a garden, it doesn't end there. You must monitor, nurture. Sometimes you pare, sometimes you plant more seeds. Talk to your friends, and read smart stuff from smart people. Avoid online chats that look suspicious. And remember that not every pick will be a winner. Be ready to take your losses, learn, and move on to better bets.
Like riding a motorcycle or skydiving, buying and selling stock without guidance isn't for everyone. But smart investing should be available to anyone who wants to get into the market, so the option to hire a financial advisor or stockbroker is always there. If you do want to jump in and buy stocks, be sure to understand your finances, your risk tolerance, and your investing psychology. Keep your passwords safe, and remember to walk before you run.
Should you use a broker or take a D.I.Y. approach to investing?
That depends on a few factors. Do you want to research your investments? Can you evaluate a company? Do you understand time horizon or your appetite for risk? Understanding these things requires time, so you want to consider handing your money to a professional.
What kinds of investments don't require a brokerage?
Direct stock plans and dividend reinvestment plans (DRIPS) permit individuals to buy shares from participating companies. You can buy stock from certain companies, and the plan will automatically reinvest the dividends the companies pay out. Of course, this option is available through online brokerages.
What are the basic steps in buying stock?
Investors must first find a brokerage they like. Then, they have to fund the account with a check or bank transfer. Researching investments is the next critical role, and implicit in this is understanding your finances, goals, and risk tolerance. Clicking to buy is the following step, with the longest phase typically being the nurturing, or tending of your investments.