How To Trade Stocks: Step-by-Step Guide to Buy Individual Stocks
If you want to buy a specific stock, it's important to understand what you are getting into.
Investing in individual stocks is riskier than fund investing. With a fund, you have the benefit of professional management of a fully diversified portfolio that may include hundreds of companies. But when you invest in individual stocks, you'll be limited to a smaller number of stocks that you'll be fully responsible for managing. Knowing how to buy individual stocks is critical to your success. Here's our guide to how to trade stocks and Stock Trading.
In This Article:
What is Stock Trading?
If you're investing in the stock market, does that make you a stock trader? Maybe — but maybe not. Just because you are investing in the stock market doesn't mean you are stock trading. There are several types of investors, and it's good to know where you fall on that scale.
Stock trading refers to the act of actively selling and buying stocks to try to maximize profit on the market's daily fluctuations. For example, say an airline stock opens the trading day at $56 a share. By 3 pm, it is at $65 a share. Someone who buys $500 worth of that airline stock at the start of the day and then sells it at 3 pm would be a stock trader.
Stock trading requires more hands-on action and knowledge than passive investing. For these reasons, it's essential to know and understand the world of stocks investing before you jump in.
Step 1. Decide Which Platform You Want to Buy Stocks With
Once you feel that you understand the world of stock trading well enough to put some money into the market, you'll need to decide how you want to buy stocks. There are three main options when it comes to buying stocks:
- Full-service stock brokers – This is the most popular way to trade stocks but also the most expensive. Full-service stock brokers are licensed broker-dealers and offer several services, including research, wealth management, and tax planning. It's best for people who want to trade individual stocks or options but don't have time to stay up to date on things like tax planning. You'll often be assigned a broker who handles your trades for you.
- Discount stock brokers – If you want to trade stocks but don't need all the extra perks of having a personal broker to help you, then we recommend trying out discount stock brokers. These are brokers that are often accessible online and are a fraction of the cost of a full-service broker. In fact, you can often trade commission-free.
- A direct stock purchase plan – If you want to buy stock directly from a company without using a broker, you'll need to use a direct stock purchase plan. Not all company's sell their stocks directly to retail investors, and they often have restrictions in place, like when you can buy or sell the company stock.
Our Recommended Stock Brokers for Stock Trading
Each of the brokers listed below has been reviewed here on Investor Junkie and will be a good trading platform, depending on your individual needs.
Most of these brokers also offer the full range of investments, including mutual funds, ETFs, bonds, and options. Many also provide their own robo-advisor service, as well as other managed portfolio options. But the summaries below will focus on what they offer for buying individual stocks.
1. TD Ameritrade
- Minimum investment: $0
- Commissions on stock trades: $0
- Customer service: Phone, live chat, text and email 24/7
- Current promotions: None
TD Ameritrade isn't the lowest priced broker on this list, but the company is famous for strong customer support. What's more, it's connected with TD Bank, which has hundreds of branches in many US states. Each branch has a broker contact and is often open even on weekends. It's an excellent choice if you want to invest where you bank.
2. Ally Invest
- Minimum investment: $0
- Commissions on stock trades: $0
- Customer service: Phone, email, and chat seven days a week from 7 am-10 pm (Eastern Time).
- Current promotions: Up to $3,500 in bonus cash.
Ally Invest has come up rapidly in recent years as a full-service discount broker. It offers investment services comparable to much larger brokers but often at lower (or for no) fees.
Another significant advantage of Ally Invest is its link to Ally Bank. It offers some of the very highest interest rates on savings products available anywhere, as well as some of the most innovative auto financing programs in the industry.
3. Merrill Edge
- Minimum investment: $0
- Commissions on stock trades: $0
- Customer service: Phone 24/7, plus live chat and email with more limited hours.
- Current promotions: Get up to $600 when you open a new account.
Merrill Edge, the former Merrill Lynch, is another popular investment brokerage connected to a major bank. It's another example of a platform where you can invest where you bank. And since that bank is Bank of America, there's probably a local branch in your community. Merrill Edge is another full-service discount broker. Its trading platform and customer support are among the best, and it has special perks for Bank of America customers.
4. E*TRADE
- Minimum investment: None
- Commissions on stock trades: $0
- Customer service: Phone, email and live chat 24/7
- Current promotions: None
E*TRADE has one of the most robust trading platforms in the industry. Known as the Power E*TRADE Pro, it's one of the most comprehensive and user-friendly trading platforms in the industry. In fact, it's often cited as one of the best trading platforms available for self-directed investors. And if you're interested, it has one of the lowest mutual fund trading fees in the industry, at just $19.99 per trade.
5. Robinhood
- Minimum investment: $0
- Commissions on stock trades: $0 per trade
- Customer service: Email only
- Current promotions: None
Robinhood is another free trading platform. And much like Firstrade, customer service is very limited, making it a platform primarily for self-directed investors who don't need to rely on broker advice or information. One of the unique features of Robinhood is that you can also trade cryptocurrencies, in addition to stocks and other investments. However, be aware it doesn't offer mutual funds or a managed investment option. And if you're looking to invest through an IRA, that option isn't available either.
6. Zacks Trade
- Minimum investment: $2,500
- Commissions on stock trades: $0.01 per share, with a minimum of $3 total per trade
- Customer service: Phone, email and live chat during regular business hours.
- Current promotions: Get trades as low as $1.
Zacks Trade isn't a free trading platform, but it has one of the lowest trading fees in the industry (although it can be a bit complicated to figure out). What's more, you can make broker-assisted trades at no additional cost. The service is also available for investors in more than 200 countries around the world. Just be aware that, like other very low- and no-cost investment brokers, it's a platform designed for more advanced self-directed investors.
7. Public.com
Minimum investment: $0
- Commissions on stock trades: $0
- Customer service: Phone and live chat during regular business hours, plus email.
- Current promotions: None
Public.com is a commission-free stock and ETF trading app for iOS and Android. The company allows you to invest in fractional shares of stocks and ETFs, so you can buy in dollar amounts instead of by a number of shares. Plus, a sharing feature makes your trades public and allows you to view the portfolios of others.
Step 2. Make Sure You Have Your “Financial Ducks in a Row”
You should always plan to have several stocks in your portfolio. For example, if you have $10,000 to invest in individual stocks, you should plan to spread the investment across several different stocks and maybe as many as 10. That will limit your loss should any single company you own collapse in price.
You should also consider adding a stop loss to each stock holding. That will limit your loss by triggering an automatic sale if the price falls. Full-service brokers have video tutorials that will show you exactly how buying stock works on their platform. Be sure you're familiar with the process before you begin.
- Start with an emergency fund. This is a completely safe and liquid account with sufficient funds to cover at least three months' living expenses. It should be held in a bank account, where it's fully insured and available to be accessed quickly in an emergency. Having this type of account will keep you liquid, avoiding the need to sell investments to pay for emergency expenses.
- Next, your debt should be well controlled. It's fine if you have a mortgage, a car loan, or student loan debt. But if you have substantial credit card debt, the best “investment” will be to pay it off or pay down. It will do you little good to pursue a 10% return in stocks when you're carrying credit card debt that's costing you 20%.
- Make sure you have other investment types. At least some of your portfolio should be invested in bonds to reduce overall investment volatility. But it's also a good strategy to have money invested in managed accounts. These can include having some mutual funds or exchange-traded funds (ETFs) or even robo advisors. Any of these options diversify your stock holdings between professionally managed and self-directed portions.
Step 3. Set a Budget
When creating a stock budget, keep these questions in mind:
- How much of my profit will I reinvest into stock trading?
- If I lose money, how long will I wait before getting back into trading?
- What constitutes a “good trade” for me?
- How much of my portfolio do I want to expose to individual stocks?
Step 4. Learn To Do a Proper Research of a Stock
- Look for companies that have an established track record over several years of increasing revenues, profits, and dividends.
- Look closely at the company's product line and assess how competitive it is within its industry. Naturally, a more innovative company is likely to outperform any “me too” imitators.
- It's also important to know the industry the company operates in, which means studying its competitors. The company's future performance will depend largely on how strong it is within its industry group. If it's growing faster than its competitors and introducing more popular products and services, it's likely to continue performing at a high level.
Evaluate the Company's Competitors
There are several metrics you can use to compare a company to its competitors. For example, you can use the P/E ratio (We have a comprehensive guide here). If you're looking at a company that has a P/E ratio of 15 and the average for the industry is 20, the company is likely to outperform its competitors as long as the low P/E ratio isn't due to a negative factor with the company.
Use an Investment Research Service
It will help to subscribe to an investment research service, such as Morningstar, which you'll pay a subscription fee for. But many full-service brokerage firms offer a large amount of research and analysis on thousands of individual companies. Make sure you take full advantage of this information before buying any individual stock.
Step 5. Practice Trading with a Simulator
Step 6. How to Buy a Stock
- First, decide which stocks you want to buy and how many. Research companies that you already know. If your broker offers third-party research or investing tips, start there. You should also read financial news about the company, such as how well they performed during the last year. You can also check out recommendations from financial analysts, although you will probably have to pay extra for that.
- Next, choose your stock order type. Essentially you will indicate what you want to buy and for how much. If you're buying at the market price, then the order is executed immediately. If you have a specific price in mind that you want to trade at, then you'll put in a limit order, which tells your broker to wait until the price falls.
Warning: Most brokers are set up for self-directed trading. If you need broker assistance, the trading fees will be much higher. You may want to use broker assistance on your first trade. But after that, you'll need to get comfortable with online trading.
Step 7. How to Sell a Stock
- At the very least, you should limit the costs of what you originally purchased the stock for.
- If you want to sell the stock immediately, you'll sell at market price. But if you want to sell at a specific price, then you can set a limit order. Your stocks will only sell when the price you set is reached.
- If you're buying and selling through a broker, you'll also need to fill out a trade ticket or order to initiate the sale.
- Once the sale is made, the cash will usually transfer to your account two days after, although the processing time varies by broker.
Stock Trading Terms You Need to Know
Virtually every financial venture has its own “language,” and that includes investing in stocks. Basic terms you'll need to be familiar with include the following:
- Ask — This is the minimum price that the seller is willing to accept for the stock.
- Bid — The max price that buyers are willing to pay for a specific stock.
- Spread — The difference between the lowest ask price and the highest bid price.
- Market order — A request to buy or sell stock at the best available price as soon as possible.
- Stop order — The price that the stock must reach for a market order to be executed.
- Stop limit order — This is when the price has been met and is filled until price limits can be met.
- Round lots — This refers to buying blocks of stock, usually 100 shares (or more) at one time.
- Odd lots — This refers to buying less than 100 shares. For example, you might buy 30 shares.
- Fractional shares — Many stocks today trade at several hundred dollars per share. If you're investing a flat amount, say $2,000, and the price of the stock is $150, you'll need to buy 13 1/3 shares to complete the order. The 1/3 is a fractional share.
- Market order — This is an order you place with your broker to purchase stock immediately at the best price available.
- Limit order — This is an order where you set a specific price you're willing to pay for a stock. The broker will wait to purchase the stock until that price, or a lower one is reached. Limit orders can also be placed on the sale of the stock. For example, if a stock you own is currently at $25 and you want to sell at $30, you can place a limit order to sell when the price reaches $30.
- Stop-loss order — This is a price you can set on a stock you own that essentially creates a floor. For example, if you purchase a stock at $25, you can set a stop-loss order at $20. Should the stock price fall, the sale will be triggered at $20, which will limit your loss.
- Earnings per share (EPS) — This is the company's annual profit divided by the number of common stock shares outstanding. If the company has $10 million in net profit and 5 million shares outstanding, it's EPS is $2.
- Price-earnings ratio (P/E) — This is the current stock price divided by the EPS. If a company's stock is trading at $50, and it has an EPS of $2, the P/E ratio is 25 (50 divided by 2). P/E ratio is a way to compare the performance of a company with its competitors. Generally, the lower the P/E ratio, the better.
Bottom Line: How to Survive (and Thrive) With Stock Trading
Being a good stock trader is less about being a hotshot like in a Hollywood movie and more about seeing a profit from your efforts. To that end, here are our tips for stock trading.
- Keep excellent records: This is for personal and tax reasons, especially if you are trading outside of a retirement account. You'll have to report your profits to the IRS, and excellent records will make that easy and help you avoid an audit. Plus, keeping tight records will help you track your own progress and growth.
- Build over time: There is no need to jump in with everything you've got in your first trade. You can and should take things slowly at first. Control your exposure risk factor and make sure that you are building an overall portfolio that works for your long-term and short-term goals.
If this world excites you, get into it!
- Learn everything you can and practice on paper-trading apps.
- Read about the markets every day and soak in as much as you can about the investing world.
Knowledge is power in the world of stock trading, so keep learning, keep adjusting your strategy as needed, and keep track of your results.
