Contents
Stock Investing Basics
Types of Stock
Stock Indices
How to Determine Your Level of Risk Tolerance
How to Plan Your Stock Portfolio
How to Research Stocks
How to Buy and Sell Stocks
How to Manage Your Stock Portfolio
Stock Investing and Taxes
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How to Buy and Sell Stocks
As an individual investor, you can buy and sell stock only if you have an account with a stock broker or brokerage house, the middleman between you and the market.
- Stock broker: Either an independent local professional or an employee of a brokerage house whom you call to place orders to buy or sell stock. A broker will work with you one-on-one via phone or in person to make investment decisions. He or she will personally place orders to buy and sell stocks for you.
- Brokerage house: A firm that specializes in providing investment services, such as stock trades. Most brokerage houses have websites that provide data for investors to do their own stock research and allow investors to place orders to buy or sell stocks online without having to speak to a representative. Some of the most popular brokerage houses include Fidelity, Charles Schwab, Vanguard, and TD Ameritrade.
Whether you choose to work with a personal broker or with a brokerage house through a website is up to your personal preference.
Brokerage Commissions
All stock brokers and brokerages charge commissions (transaction costs) for executing orders to buy or sell stock. These commissions may be charged on a per-share basis or as a flat fee per transaction. Transactions involving quantities of shares not in multiples of 100 shares (called a round lot) may have higher commissions.
The size of the commission charged, however, is usually much higher for trades placed by personal brokers than for trades made online. Commissions for online trades range from about $7–30 per trade, whereas brokers’ commissions can be in the hundreds of dollars. Confirm commission rates before choosing any broker or brokerage.
How to Set Up an Investment Account
To set up an investment account, you must complete three steps:
- Choose a brokerage house or an individual stock broker with whom you’d like to open an account.
- Fill out an application that consists of a few basic forms with your personal information, including your name, address, and Social Security number.
- Make an initial deposit into your account via cash, check, or wire transfer. The amount required to establish an account varies but usually starts at $1,000.
Most major financial institutions allow you to set up an account in person (if they offer retail locations), by mail, over the phone, or online. If you complete your application by phone or online, you’ll still likely have to complete and mail in physical forms with your signature to establish your account.
Types of Investment Accounts
There are two main types of investment accounts in which investors own stocks and other investments: brokerage accounts and retirement accounts.
- Brokerage accounts: Also known as taxable accounts, these accounts enable you to add or remove any amount of money at any time. However, you must pay income taxes on all dividends received and capital gains taxes on all assets sold at a profit (see Stock Investing and Taxes).
- Retirement accounts: Accounts that offer special tax advantages on money invested exclusively for the purpose of retirement savings. You may add only a fixed amount each year to these accounts and face penalties if you withdraw money early. However, you pay no tax on dividends or capital gains until you begin to withdraw money from the account (usually after age 59 1/2), which can drastically improve returns over time.
Buying Stocks for Brokerage vs. Retirement Accounts
In order to minimize your tax burden, it’s better to hold certain types of stocks in your brokerage accounts and other types in your retirement accounts. When deciding where to hold different stocks, you should also keep in mind your risk tolerance and income needs.
- For retirement accounts: Since these accounts let you receive and reinvest dividend payments tax-free, the potential for compounded growth over time is immense. Therefore, in your retirement accounts you should tend to buy and hold stocks that pay dividends.
- For brokerage accounts: Investors often buy riskier stocks only in brokerage accounts, since brokerage accounts can be replenished with new cash at any time, and with no contribution limits, if one or more investments performs poorly and needs to be replaced.
The Process of Buying and Selling Stock
Once you decide to trade (buy or sell) a particular stock, the process will differ slightly based on whether you’re working with a full-service broker or an online brokerage. For instance, if you want to buy 10 shares of Google at $400 per share:
If You’re Trading with a Personal Broker
- You’ll contact your broker and tell him or her you want to buy 10 shares of Google.
- Your broker will ask you the highest price per share you’re willing to pay for the shares.
- Your broker will place the order with a brokerage.
- The brokerage will send your order to the exchange, where either a person, known as a market maker or specialist, or a computer will fulfill the order.
- The exchange will send back confirmation once your order executes, or is filled.
- In your investment account, $4,000 will immediately convert to 10 shares of Google stock. A commission for the trade will also be deducted from your account.
If You’re Trading Online through a Brokerage
- You’ll place the order directly with the brokerage by logging into your account online and filling out a stock order form. To fill out the form, you’ll need to know the number of shares you wish to buy, the ticker symbol, and the type of order you prefer (explained below).
- The brokerage will send your order to the exchange, where a person or a computer will fulfill the order.
- You’ll get an email confirming that your order has been placed, then a follow-up when your order executes.
- In your investment account, $4,000 will immediately convert to 10 shares of Google stock. A commission for the trade will also be deducted from your account.
Types of Stock Orders
There are two types of orders you can use when buying or selling a stock:
- Market order: You agree to buy or sell a particular stock at the price specified by the market.
- Limit order: You specify the maximum price at which you’re willing to buy, or the minimum price at which you’re willing to sell.
Type |
Pros |
Cons |
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Market
order
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Guarantees that your order will execute, regardless of any rise or fall in the share price. |
Your order can execute at any price the market determines, including a price that’s higher or lower than you’d prefer. |
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Limit order |
Prevents orders from executing at prices above which you want to buy or below you want to sell. |
Your order will not execute unless the conditions that you specify can be met in the current market. |
Commissions are generally lower for market orders than for limit orders, though the price difference is rarely substantial enough to justify using a market order.
When to Use Limit Orders
In general, use limit orders every time you buy or sell stock. You can avoid the main downside of using limit orders—that your order won’t execute due to sudden market fluctuations—by setting a bid price equal to your stock’s current ask price. The ask is the lowest price for which an owner of the stock is currently willing to sell; the bid is the highest price a buyer is currently willing to pay. For example, if you wish to buy a stock with a current ask price of $10 (and you’re comfortable paying that price), place an order that specifies $10 as your limit. You’ll be certain to obtain the shares as long as the seller is offering as many shares as you’d like to buy. At the same time, the limit order guarantees that you won’t pay more than $10 per share.
When to Use Market Orders
Use market orders only if you absolutely must sell your shares of a stock, regardless of price.
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