Chapter 7:

How to Buy Stocks

A Beginner’s Guide to Purchasing Shares

Are you ready to hit “buy” on your stock choices?

In the last chapters, we covered how to analyze a business for it’s meaning, management, moat, and margin of safety – and just before this we did a deep dive on the financials and growth that makes a business a good investment idea.

If you’ve followed along and done your research, chances are you have at least a couple of companies on your watch list. So now, let’s make sure you’re really ready to pull the trigger and know exactly how to buy stocks so you don’t rush into a potentially bad investment

Important: At this stage you should have:

  1. Put in the work to learn how to invest on your own 
  2. Developed a watchlist of wonderful companies worth investing in
  3. Determined a “buy price” for each company that is 50% off its true value

If you can check off these three things, keep reading. If not – go back a few chapters and catch up.

Now that I know you’re really ready, I’ll teach you how to actually purchase a piece of the businesses on your watchlist.

Whether a company on your watchlist just hit its buy price or you just want to be prepared when that time comes, knowing how to buy stocks is obviously crucial. Here’s what you can expect. 

Chapter Guide

  1. How to Pick an Online Broker
  2. Create An Account
  3. Set a Budget and Upload Funds
  4. Determine Your Types of Stock Orders
  5. Wait For the Right Price and BUY!
  6. Know When to Sell
  7. Start Training

If you have never purchased shares of a company before, don’t fret – it’s actually pretty simple once you get the hang of it. With this guide on how to buy stocks for beginners, I’ll walk you through the steps you should take now so you’re ready when the time is right. You’ll learn where to buy stocks, how to buy stocks online, and how to sell stocks, all in six simple steps. 

Step 1: Pick an Online Broker

The first step is to pick a broker. A broker is a middleman between an investor and a stock exchange, and every investor needs one in order to buy and sell stocks. 

Types of Brokers

There are a lot of trustworthy brokers you can choose from. Let’s review them so you know which one sounds best for you.

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Full-Service Broker 

Full-service brokers are individuals who offer brokerage services either in-person or over the phone. Their services include buying or selling stock for you and managing your investment strategy.

The main reason people choose a full-service broker is because they can offer personal guidance on how to invest money, BUT you already know how to do that, and your broker isn’t necessarily going to follow the same strategy you want to. Plus, personal service and guidance come at a price. You’ll fork over hefty fees for every trade you make AND for the broker’s time.  

Discount Brokers

Not everyone can afford to pay a full-service broker’s fees, which is why there are discount brokers. While “discount” may sound enticing, these brokers are typically robo-advisors following computer algorithms to invest money.

Once again, if you already know how to invest your money and have a strategy that won’t lose you money, why would you entrust investing decisions made with your money to a computer? 

Warning: If you don’t know how to invest and you want to be hands-off, a discount broker will be the easiest and most affordable way to put your money in the market. Buyer beware, though, you may not make a good return on your investment.

Online Brokers

Using an online broker is convenient and DIY-friendly. Online brokers give you total control over how much you want to trade and when, and there are typically only small fees for each trade. Plus, you can still seek out the service of a professional when you need it. 

Almost every one of the top brokerages has an online trading platform that offers a great user experience that even beginners can navigate. The best brokerage accounts are rated often by reputable sources, so with a simple search online, you can find which ones offer the features you’re looking for. 

Best Trading Platform for Beginners

If you’ve made it this far, you’re a hands-on type of investor, I can tell. Here are a few of the best stock trading platform options you can use to invest on your own.

TD Ameritrade

TD Ameritrade is a great example of a reputable company that has a long-standing history, making it a trustworthy place to put your money. 

Many brokerage accounts require investors to hold a minimum balance but TD Ameritrade has no minimum balance requirement as well as no fees on stock trades.

Tip: There are important features to consider when deciding which brokerage to choose. They, like many seasoned companies, also feature robust opportunities for education and helpful customer support.

Power E*Trade

E*Trade is another great option for both beginner investors and experienced investors. It’s also a long-standing online brokerage with a great track record, $0 fees for individual stocks, $0 minimum to create an account, and plenty of educational resources.

The Power E*Trade platform offers even more tools and data that are extremely useful for not only making trades but also researching companies you may want to invest in. 

Robinhood

Robinhood was one of the first brokerage companies to come out with a purely application-based trading platform, and one of the first to offer zero-fee trading. For these reasons, it gained incredible popularity.

Another one of the benefits of investing with Robinhood is that you can purchase fractional shares, however, this is actually doable through most online brokers today. 

Investing with newer application trading platforms has its benefits – but it also has risks, too. Don’t invest with one of these easy-access applications without knowing what you’re getting into. In this video I talk about what you have to look out for: 

Even though it’s a newer company, buying stocks on an app is the same as it is on any other trading platform. So, if you’re wondering how to buy stocks on Robinhood, you can still follow the steps below. 

Step 2: Create An Account 

Creating a brokerage account is the easiest part once you’ve selected the right brokerage for you.

What do I need to open a brokerage account?

Before signing up, have this information handy to make the process even more seamless: 

  • Social Security number or Tax ID number
  • Driver’s License or other form of ID
  • Address
  • Employment information
  • Annual income and net worth
  • Date of birth

All you have to do next is fill out the required information and connect your bank account in order to deposit funds. 

Step 3: Set a Budget and Upload Funds

Before you deposit funds into your newly created brokerage account, it is important to know how much you plan to invest based on your budget. Keep in mind that certain types of accounts within your brokerage account, such as IRAs (Individual Retirement Accounts) limit how much you can contribute annually. However, if you plan to invest more than this amount each year, there are plenty of accounts to choose from that can meet your needs. 

How Much Should I Invest? 

You don’t have to start with a lot of money in order to invest. The great thing about Rule #1 Investing is that you can grow any amount of money into a substantial amount by investing in great companies that will deliver great returns over the long run.

The 5-Step Checklist for Picking Stocks

Learn how to find, evaluate, and invest in Rule #1 approved companies.

This means you can get started with as little as $500

If $500 sounds like a lot of money to invest, remember, you have already invested time and energy into learning how to invest so that you can minimize your risk and maximize your reward. You don’t have to be afraid of investing when you put in the work ahead of time and know what you’re doing. 

How Many Shares Should I Buy? 

Determining your budget will also help you decide how many stock shares to buy. Investing in stocks isn’t the same for everyone. While one investor may want to buy in all at once, another investor may want to test the waters and start small.

Additionally, while one investor may want to own a certain number of shares, another investor may want to invest a certain amount of money. If you fall into the latter category, you may want to consider purchasing fractional shares.

Purchasing fractional shares of stock can be especially helpful if you’re starting out with a small amount of money but have your eye on companies with pricey stocks. 

Transfer Your Funds

Once you have set your budget and determined how much money to invest, you can simply transfer the funds from your bank into your brokerage account. Once the transfer is complete, you are ready to place your stock orders.  

Step 4: Determine Your Types of Stock Orders

Now, you have to decide what type of order you will place when you purchase the stock. For Rule #1 investors, these are the types of orders you should be well acquainted with. 

Limit Order

When you purchase stock with a “limit order” you are essentially putting a cap on the price you are willing to pay for that stock. Remember, your broker is the middleman between you, the buyer, and the sellers of the stock you wish to purchase.

Your stock order will only be fulfilled if the broker can find a seller who wants to sell at your limit price. This means that even if you place the order, it won’t be fulfilled in full unless the price is met for all the shares you want to purchase. 

As a Rule #1 investor, you have already determined the right “buy price” so it’s important to place a limit order on your investment to ensure you don’t pay more than that price. Setting a limit order can also make your job as an investor easier.

If you set a limit order at the “buy price” that you have determined for a specific stock, then the brokerage will execute the order for you when the time is right, so you don’t have to constantly keep your pulse on the stock price. 

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Learn how to start investing in any market condition with more confidence and less risk

Stop Order

A stop order, often called a “stop-loss” order, allows you to input a certain price that once the stock reaches said price, you will buy or sell shares. When the stock reaches that price, it will trigger a “market order” to buy or sell the stock. When you execute a market order, your broker will find the best available price as soon as possible, which could be higher or lower than the stop price.  

Stop Limit Order

A stop limit order is like a stop order, but with one key difference.

Key Takeaway: Instead of purchasing or selling the stock at the market price when it reaches a certain amount, there is a limit put on the order.

The distinction is important because of how quickly the market moves. If the stop is triggered, but the limit isn’t met, then the order won’t be fulfilled.

Stock prices are constantly changing so it’s important to put these parameters in place when you want to buy or sell at a specific price, or only below or above a certain price. If you purchase stock without a limit or stop price, you will get the best available price at that time, which, as I mentioned above, is called a market order.  

Step 5: Wait For the Right Price and BUY! 

Now that you know how to start buying stocks, it’s time to… WAIT. 

Yep, you read that right. A patient investor will always perform better than an impatient investor.

The right time to buy stocks isn’t once you know how. 

Remember what you have learned and wait for the right price, which is when the stock price of a company on your watchlist reaches the buy price you calculated, which means it’s 50% off. You wouldn’t buy the company at 30% off if you knew a bigger sale was coming, right?

Even if a stock seems like a great deal at the moment, stick to what you know and hold out for the right price.  

THEN (and only then) you buy. 

Tip: When the opportunity to buy a wonderful company at 50% off arises, it’s time to act. The good news is it only takes a few minutes to actually buy the stock when you’re ready.

If you’re not sure why a company should be on your watchlist, or how to figure out when it’s on sale, read this complete guide (before you even think about buying).

Step 6: Know When to Sell

Knowing how to buy stocks is only half the battle. You have to know when to sell too.

Now, this time doesn’t come around very often. Remember, we invest for the long term. 

However, there are a few instances when it makes sense to sell

You Need the Money

First, if your lifestyle changes and you need the cash i.e. you’ve reached retirement, lost your job, or are ready to purchase a home.

The Business Changed

You also may need to sell if the business you invested in is no longer wonderful. This could occur for a number of reasons including a change in management, increased competition, or a major event that makes them irrelevant and erases their moat.

Important: You should always re-evaluate the businesses you are invested in on a regular basis to check that they are still a great investment. Just because we invest for the long-term, doesn’t mean we just set it and forget it.  

The Business is Priced Over Value

Finally, if the stock price of the business is higher than the price you value it at, it’s time to sell. If this is the case, and you bought the business at the right time, then you will have made an incredible return on your investment. 

How to Sell Stocks

Learning how to sell stocks is the same as learning how to buy stocks, so you already know the steps. When you’re ready to sell, simply go into your brokerage account and place a sell order for the shares you want to sell. Remember to put a limit on it if there is a certain price you don’t want to sell below.  

Start Training

Now that you know how to pick stocks, how to buy stocks, and how to sell them, you’re not a beginner anymore! 

You are ready. BUT – there is still plenty of information out there that can help you. Jump to the next chapter to review my list of books EVERY investor should read.

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Hi, I’m Phil

I’m a full-time investor and 3x New York Times best-selling author. I want to help the little guys, people like you and me, gain financial freedom by using simple principles that Warren Buffett and Charlie Munger have been using for over 80 years.

I have a passion for investing and I can’t wait to share it with you.