How to Buy Shares
Shares are one of the most important and lucrative investment classes. Some of the richest people in the world have created their wealth by investing in stock markets. While the creation of wealth is a long and systematic process, the first thing that you need to do is to complete the formalities and be ready to start buying and selling shares. Let's look at how to buy stock of a company.
The most common to buy and sell shares is to open a brokerage account with a broker dealer. There are different types of stockbrokers and you need to select a stock broker that suites your needs. There are some stockbrokers that just provide simple services to help you place buy and sell orders. On the other hand there are some extensive brokerage services that not only facilitate the trade but also provide you extensive research to help you in selecting stocks. A brokerage account can be managed online or through a broker who takes order in person or over phone. An example of a brokerage company is Charles Schwab that provides all services related to trading in stocks. If you just want to do online trading, then the popular options are E-Trade and Ameritrade. These two are the most popular electronic brokerage firms.
To open a brokerage account, you will have to fill up a form and submit some documents such as your Social Security Number, Driving License number, and other personal proof. Once the brokerage account is operational, you can link your brokerage account with a bank account that you will use to transfer money from and to the brokerage account. After doing that, transfer some money to the brokerage account from where you want to buy/sell shares.
At this point you are all set to buy your first shares. You now have to pick stocks. The best way to select stocks that you want to invest in is to first make an assessment of how much risk you are willing to take and how much returns you are expecting from your investments. Once you know this, you can either perform your own research to select stocks or you can depend on your broker’s investment advice. Usually, the brokers will recommend a selection of stocks that you can invest in. Such recommendation will provide you information such as the current stock price, why the stock price is expected to rise, what is the target price that you can expect and an expected time frame when the target will be achieved. As you start trading you will initially depend on stock advice from brokers and other you know. Slowly you will gain an understanding of the dynamics of stock markets and will be able to make your own selection. The important thing is make your selection objectively and not get carried away by news and other promotional material. This type of research is called fundamental analysis. There are also people who look for trends in stock prices and try to predict the direction in which the stock prices will move. They extensively use charts to identify patterns in stock price movements. Such analysis is called technical analysis.
Now that you have selected the stocks that you want to buy, it is time to place the order with your broker. In the stock markets buyers and sellers interact with the brokers and the exchange in order to issue and fulfil their orders. At the minimum an order specifies which instrument to trade (in this case stock), how much and whether the trader wants to buy or sell it. Apart from that, there are additional instructions that are supplied along with the order that define the behavior of the order and its execution.
The two most common types of orders are market orders and limit orders.
In a market order, the broker gets the best available price and executes the trade immediately. For a buy order the broker will accept the lowest price available and for the sell order the broker will accept the higher price available. The problem with market orders is that there is no guarantee of execution price. The price could rise or fall from the time the order is placed to the time it is executed.
The limit order is similar to a market order, and the broker is required to find the best available price. However, there is a limit set for the execution price. For a buy order, the broker cannot execute the trade at a price higher than the specified limit, and for a sell order the broker cannot execute the trade at a price lower than the specified limit. For example, “buy at $50 or less” and “sell at $52 or more”. A problem with limit orders is that they may not get executed if the broker is not able to find the price within the limit specified.
Another type of order is a stop loss order. A stop loss order lies idle and turns into market order when a certain price is reached, i.e., the stop price. For example, “buy if price rises to $60” or “sell if price falls to $58”. They are also called stop loss orders, because an investor is able to prevent losses or to protect profits.
All these types of orders can be placed through your online brokerage/trading account or through your broker in person. Once the order is executed, the money will be deducted from your account and the shares that you’ve purchased will be added. You can anytime login and check the value of the stocks in your account. When you feel the time is right, you can place another order to sell these stocks and make a profit.
In every transaction to buy or sell stocks, the broker charges a commission that is usually a few cents per stock. You can buy shares in any number of units (minimum 1 unit of a share).
If you have any questions about buying/selling stocks, please feel free to ask them in the comments below.