• A stock represents partial ownership of a company. It’s a financial asset you typically buy with the intention of selling at a higher price for a gain.
  • Trading stocks involves opening a brokerage account, determining which companies to invest in, and then maintaining your portfolio.
  • To reduce the risk of losing money on any single stock, experts recommend holding a diverse portfolio of companies and other financial assets.

Investing in stocks is often considered a great way to build long-term wealth and protect against inflation. However, the process of building a portfolio may be challenging for some — especially if you're new to investing.

Here's what you need to know about how to buy stocks and what you may want to consider before including them in your portfolio.   

What Are Stocks?

A stock (or equity) is a unit of ownership in a company. Holding shares of stock means you’re entitled to a portion of the company’s earnings, assets, and, in some cases, voting rights. In other words, as the company prospers, so do the shareholders.

The shares of publicly traded companies are traded on stock exchanges such as the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ). During normal market hours, investors are free to buy and sell stock through orders placed with a brokerage company — an intermediary service that facilitates transactions directly with the stock exchanges on your behalf.

Why Invest in Stocks?

There are several good reasons why owning stock may be beneficial for your financial well-being.

Potential for Long-Term Growth

In general, you buy stock because it’s a capital asset that you hope to sell in the future for more than what you paid originally. The difference between these two values is called a “capital gain.” Alternatively, if you sell the stock at a lower price, this is called a “capital loss.”

When held over the long term, the returns generated by stocks are often compounding due to reinvested dividends — meaning they build upon one another over time. For example, the Standard and Poor's 500 (S&P 500) stock market index, a collection of the top 500 U.S. companies, has returned a compounded annual growth rate of 10.49% over the past 30 years (1995-2024).[1]

Dividend Income

Some companies may choose to periodically distribute a portion of their earnings to shareholders through what are known as dividends. Dividends are typically distributed on a quarterly basis, and you’re free to use the money any way you wish. Many investors choose to re-invest the dividends to buy more shares of the company to potentially increase the compound returns, a strategy known as a dividend reinvestment plan (DRIP).

Diversification Benefits

Stocks are often thought of as being higher risk, higher reward than bonds or cash investments. Therefore, including them as part of your investment portfolio may add an element of long-term growth and consistent income through dividend payments.

Flexibility and Control

Equity-based mutual funds and exchange-traded funds (ETFs) may be a simple way to invest in stocks. However, these types of funds often hold shares from hundreds of different companies and regularly charge annual fees.

By contrast, buying stocks individually may give you the opportunity to invest in select companies you truly believe might prosper. It may also help you avoid fees since many brokerages have eliminated trading commissions.

Steps To Buy Stocks

The process of buying stocks may be done as follows.

1) Decide How You Want To Invest

Before buying any financial asset, it's often recommended to begin with the end in mind. Ask yourself: What are my financial goals? How will investing in stocks get me there?

While owning individual stocks is one option, keep in mind that there are other ways to benefit from the stock market. For example, you might choose to buy mutual funds or ETFs that already hold a diverse group of equities.

2) Open an Investment Account

There are several good places to begin trading stocks.

  • Full-service investment firms
  • Online discount brokerages
  • Trading apps
  • Banks and credit unions

Before making your selection, be sure to investigate the service provider to ensure they’re legitimate.

3) Research Potential Stocks To Buy

Given your financial goals and investment strategy, the next step is to choose which stocks you should put your money into. This may be accomplished using a variety of commonly used methods:

  • Fundamental analysis: Comparing the health of the business against potential future trends. This may also include the use of widely recognized ratios for profitability (P/E, EPS), growth (PEG), debt (Debt-to-Equity), etc., and comparing them against other stock prospects.
  • Technical analysis. Using statistical trends in the stock's recent price movements and volume over time. This typically involves charts and other various indicators to make assumptions about future price movements.

There are many good resources for finding this information. However, you may wish to avoid following the advice of any one person, website, or social media channel.

4) Decide How Much To Invest

The amount of money you might use to buy stocks will depend on several factors:

  • How much money is needed to hit your financial goals?
  • What portion of your budget is left after paying your necessary expenses?
  • Are you already contributing to another investment account, such as a 401(k) or an IRA?

Consider these points and then determine how much you have available.

5) Place Your First Trade

Modern trading platforms have made buying a stock fairly straightforward. After connecting your brokerage account with your bank, you:

  • Type in the name of the stock (typically using the ticker symbol)
  • The number of shares (or dollar amount) you'd like to purchase
  • Place your trade (i.e., order).

Note that there are several common types of orders:

  • Market Order: Buys or sells a stock immediately at the best available price. 
  • Limit Order: Executes only at the specific price you set or better. 
  • Stop Order (Stop Loss): Becomes a market order once the stock hits your trigger price, helping limit losses. 
  • Stop Limit Order: Activates at your stop price but executes only at your chosen limit price. 
  • Fractional Share Order: Lets you buy a portion of a share using a set dollar amount. 
  • Time in Force Options: Controls how long an order stays active (e.g., Day Order, Good Til Canceled).

Generally, purchases must be made during normal stock market hours. However, some brokerages will allow for select trading before and after market operations.

6) Monitor and Manage Your Investments

Buying stocks is just the first step. Afterwards, you'll want to periodically check your portfolio to see how it's performing. You're always free to sell or make trades if a security underperforms, another opportunity arises, or you simply change your mind.

Risks and Considerations

Unfortunately, there is no guarantee that you’ll make money investing in stocks. Therefore, before making your first purchase, consider the following.

Market Volatility

If you’ve ever looked at a stock price chart, then you already know it fluctuates up and down. This is a normal phenomenon called volatility.

Stock prices change all the time for a variety of reasons:

  • Supply and demand for the equity
  • News about the company, such as its latest financial reports, leadership changes, new product announcements, etc.
  • Economic conditions or political events (like an election or war)

When the market takes a downturn, it’s important not to react emotionally and sell out of fear. Recognize that prices may just be fluctuating, and your stock might return to profitability if you give it time.

Risk Tolerance

Because there’s a possibility that your stocks may decrease in value, it’s important that you reflect on how much you’re potentially prepared to lose. The answer may help better determine your risk tolerance.

For example, one of the greatest single-day losses in recent years occurred on March 16, 2020 (the start of the COVID-19 pandemic) when the Dow Jones Industrial Average lost 12.9%.[2] Though the market eventually recovered, this may have spooked some investors, causing them to sell prematurely at a loss.

To avoid this, adjust your asset allocation according to your risk tolerance. In other words, consider limiting how much of your total portfolio is made up of stocks.

Importance of Diversification

A well-known strategy for reducing the risk of loss from any single stock is diversification. This means owning shares of different companies across various sectors (technology, financial, consumer staples, etc.). You may wish to further reduce volatility within your portfolio by also including mutual funds, ETFs, bonds, and other financial assets.

Common Questions About Buying Stocks

How much money do you need to start?

Many brokerages (especially those online) require little to no minimum deposit to begin trading.

Do you have to buy stocks through a broker?

Not necessarily. While using a broker is the most common method, some companies may allow you to buy shares from them outright, utilizing a Direct Stock Purchase Plan (DSP) or Dividend Reinvestment Plan (DRIP).

How many stocks should you own?

Although there’s no definitive number of stocks you should hold at once, many financial experts agree that diversification is key. This may range from 20 to 30 different companies.[3] Of course, the ideal number will depend on your unique investment goals and risk tolerance.

Getting Started with Stocks

The process of knowing how to buy stocks is more than just opening a brokerage account. It starts with understanding why you want to own them, which goals they may help you accomplish, and then choosing the right ones to hold. If you ever need help finding the right stocks to own, consult a licensed financial professional for guidance.