Why Learning to Buy Stocks Matters

Money sitting in a traditional savings account generally struggles to keep up with inflation over time. Stocks, on the other hand, have historically grown faster than prices rise.

According to Fidelity Investments, the S&P 500, a stock index that tracks 500 of the largest U.S. companies, has returned about 10% a year on average since its launch in 1957.

That 10% is a long-run average, not a yearly promise. The S&P 500 fell about 37% in 2008 alone, and past performance does not guarantee future results.

Here is what the difference between saving and investing can look like over time.

Imagine you put $1,000 in an account earning 2% a year and leave it alone for 30 years. You’ll end up with about $1,811. Factor in 2% annual inflation, and that money would have the purchasing power of only about $1,000 in today's dollars.

Put the same $1,000 into an investment that averages 10% a year. After 30 years, it grows to about $17,450, because each year's gains start earning gains of their own. Adjusting for 2% annual inflation, it’d be worth about $9,650 in today's dollars.

The Five Steps to Your First Stock Purchase

1. Choose a Brokerage

Pick an online brokerage. Most charge $0 commission on U.S. stocks, meaning no fee per trade, and many let you open an account in about 15 minutes with no minimum deposit.

Confirm that it’s a member of the Securities Investor Protection Corporation, or SIPC. (You can usually find that information at the bottom of the brokerage's website.) 

SIPC protects up to $500,000 per account, including up to $250,000 in cash, if your brokerage fails and your investments go missing. That protection doesn’t cover a falling stock. If your shares lose value, SIPC does not make up the difference.

2. Pick the Right Type of Account

Most beginners open  a standard taxable brokerage account. It lets you withdraw money anytime, but you will owe taxes on gains and dividends.

3. Fund Your Account

Determine how much money you want to invest and make sure it fits within your budget. A good rule of thumb is that you should never invest more than you can afford to lose.

Link your checking account and transfer money in, which typically takes one to three business days, but some brokerages let you start trading immediately.

4. Do Your Research and Decide What to Buy

Before you buy any stock, you have to make an educated decision on whether it’s a good buy.

Study a company’s finances, its business, and the economy around it. Publicly traded companies file detailed annual financial reports called 10-Ks and quarterly reports called 10-Qs with the Securities and Exchange Commission. Anyone can read them for free on the SEC's EDGAR database.

Most online brokerages also offer research and analytical tools. Some also provide educational material and tutorials.

5. Place Your Order

Once you’ve done your research and have decided on a stock to buy, search for the company  or its ticker symbol.  

A ticker is a short code like KO for Coca-Cola or AAPL for Apple. Then you enter how much you want to buy. Choose your order type, review the details, and submit.

Market Orders and Limit Orders

The order type tells your brokerage how to buy. Beginners generally need to know two types.

Market Order

A market order buys immediately at the best price currently available.

It’s fast and nearly always goes through, but the final price can differ slightly from the one you saw, especially when a stock is moving quickly.

Limit Order

A limit order buys only at the price you set or lower. It protects you from overpaying, but if the stock never falls to your price, the order never fills.

Suppose a stock is trading at $52 and you place a limit order at $50. If the price dips to $50 during the trading day, your order may be filled. But if it climbs to $55 instead, your order won't be filled, and you buy nothing.

Regular U.S. market hours run from 9:30 a.m. to 4 p.m. Eastern Time on weekdays, so an order placed at night usually waits until the next morning's market open.

What If One Share Costs Too Much?

Many brokerages now sell fractional shares, which let you buy a slice of a single share for a dollar amount you choose.

Fractional shares are also known as dollar-based orders. Instead of telling your brokerage how many shares you want to buy, you tell it how many dollars you want to invest. Then it calculates the fraction for you.

Imagine a stock trades at $500 a share and you have $50. Without fractional shares, you couldn’t buy it, because you’re $450 short. But with fractional shares, your $50 buys 0.1, or one-tenth, of a share.

If the stock price rises 10% to $550, your investment is now worth $55, the exact same 10% gain a full shareholder earns. Likewise, if the price falls 10% to $450, your investment drops to $45. Your losses scale down to your size, just like the gains.

What Happens After You Click Buy?

Your trade executes within seconds during market hours, but the official handoff of shares and cash, called settlement, takes one business day under the SEC's T+1 settlement rule.

The shares sit in your brokerage account in your name, and you owe tax only when you sell for a profit or receive dividends. Gains on shares held longer than one year usually qualify for lower long-term capital gains rates.

Is Buying Stocks Just Gambling?

A misconception about investing in the stock market is that it’s basically gambling. While they both involve risk, gambling is based almost entirely on chance. 

When you buy a stock, however, you own a piece of a real, ongoing business with sales, employees, and assets. Over long periods, that ownership has tended to compound in value and build wealth.

With investing, you’re always taking a risk that you could lose everything. One way to ease that risk is through diversification. Instead of putting all your money on one stock, you spread it out across a wide range of investments. 

That way if one stock fails, your portfolio will be able to absorb the hit easier. Diversification can also smooth out market volatility over time. As one type of investment goes down, another one might go up, which can help even out your returns.