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How to Buy Stock

Knowing the basics of how to buy stock is essential for beginning investors.

One should pay attention to stock trends before investing. [©Shutterstock, 2010]
©Shutterstock, 2010
One should pay attention to stock trends before investing.

How to Buy Stock

Stock trading was once mostly confined to financially savvy investors who had the necessary time, resources and connections to buy and sell shares of stock. The Internet, however, has leveled the playing field, allowing average Americans to trade their own shares of companies large and small, sometimes reaping major dividends in the process. Buying stock online makes buying stock more accessible to everyone.

What is stock?

Purchasing a share of stock in a company means owning a theoretical piece of that corporation. Though many companies have private owners who choose not to offer stock shares to outside investors, others may go public, offering themselves up for partial ownership on the open market. And shareholders enjoy perks such as participating in the election of company board members.

Stock prices may fluctuate wildly, and this is what makes stocks so attractive to investors. The law of supply and demand combined with other complex market forces determines the price of a company's shares of stock increasing, for example, the share price of a company expected to perform well in the future or currently reaping substantial profits, while drastically lowering the share price of a corporation barreling toward bankruptcy.

Why buy stock?

A common motivation for the average consumer to buy stock is the hope of profiting from an increase in its value. If an upstart company's shares are bought at a low price, for instance, a boost in stock price from the business success can provide the buyer with a major return on his or her investment. For example, savvy investors who bought Google stock at its initial public offering (IPO) of $85 per share have seen a staggering windfall; as of 2008, Google's share price has hovered around $500 for more than a year. This is obviously a special circumstance, however; not every company can achieve such rapid success. The pendulum can swing the opposite way as well. Investors lost hundreds of billions of dollars when the dot-com bubble burst in the early 2000s, underscoring the inherent unpredictability in stock purchases.

How to buy stock?

Though some companies sell shares of stock directly to the public, stock purchases are often made through brokers or brokerage firms. Stock brokers are generally trained professionals who navigate the red tape of stock sales, allowing investors to focus solely on managing their investments. There is no blanket definition for what a brokerage is and what it provides, however. Stock brokers may provide services such as offering advice and valuable firm-compiled data for a higher fee, while other brokerages do little more than make the stock transactions investors choose based on their own research.

The U.S. Securities and Exchange Commission (SEC) recommends that beginning investors always conduct extensive research before choosing a broker. This should include inquiring about licenses and educational backgrounds and contacting regulatory agencies to find out if complaints have been filed against them. Visit the SEC to find more tips for beginning investors.

Buying stocks online?

Though a savvy businessperson in a brick-and-mortar brokerage may be the archetypal image of a stockbroker, the information technology boom allows the average investor to tap into the power of an Internet brokerage. The electronic trading revolution is underway, and anyone with access to the Internet can take advantage of its opportunities. Buying stock online has both advantages and disadvantages. While online brokerages can save investors money, with fees as low as $5 per trade, investors are individually responsible for the investment decisions they make.

Unlike a full-service brokerage, low-cost online firms may not offer individualized, expert investment advice. This may be perfect for the savvy day-trader with plenty of knowledge and experience, but cheap, near-instantaneous but blind stock trades can be a recipe for financial disaster for a novice investor. Quick and easy trading can even be a pitfall for problem gamblers, so carefully consider the options before attempting to buy stock online.

The SEC recommends researching any online broker before opening an account, both to become familiar with the firm's procedures and to avoid unscrupulous brokers. Selecting an online broker should depend on individual preferences. Shop around and research a large number of brokers to determine what services, price ranges and advertised perks would be best for your investing strategy.

Though the options may seem endless, larger and longer-established brokers are likely a good place to start. E*Trade, TD Ameritrade, Charles Schwab and Fidelity are among the largest brokerage firms. Trade prices, services and other details may change, so do careful research and comparisons and base your final decision on up-to-date information.

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