Dear DTA,
I have never actually bought stocks before. How do I go about doing it?
-Kenneth R.
Hey, Ken. Thanks for writing in to us!
You have a great question there. Although many more experienced investors might take this knowledge for granted, we all have to start somewhere.
There was once a time when I was in your shoes, with no stocks in a brokerage account and no knowledge about how to go about buying them.
[ad#Google Adsense 336×280-IA]Back in early 2010, I didn’t know a thing about buying stocks.
And I certainly didn’t have any investments.
Not only did I not have any stocks to my name, I had lots of debt instead.
In fact, I had more debt than assets, leading to a negative net worth.
Realizing I was worth less at 27 years old than I was when I was a baby, I decided to start aggressively saving and investing.
That pivotal moment in my life eventually led to the journey toward financial freedom in my early 30s, which I recount via my “blueprint” for early retirement.
It also led to the real-life, real-money portfolio that I now control, one which generates five-figure and growing passive income for me.
But I couldn’t have gone from where I was to where I am now without the basic knowledge of how to go about actually buying stocks.
Fortunately, this process is surprisingly simple.
Investors today are actually incredibly blessed.
Back in, say, the 80s, one had to visit or call a broker to make a stock trade, and they had to pay dearly (potentially hundreds of dollars per trade) for the privilege.
Nowadays, one can buy stocks from the comfort of their home, in their pajamas if they so wish. And they can do it for a few bucks a pop.
It’s never been easier to invest money.
So you couldn’t have picked a better time to ask this question or potentially invest your money.
You simply need to open an account at one of the major brokerage firms. You can do this online, for free, in minutes.
A few examples include: Scottrade, Fidelity, TD Ameritrade, and Charles Schwab. (I’m not recommending any specific firms, so you’ll want to make sure you do your independent research before opening an account).
Once you visit a brokerage firm’s website, you simply fill out the appropriate information in order to get an account started. They’ll ask for basic personal information like your name, Social Security number, bank account (in order to fund the brokerage account), birth date, etc.
This should only take a few minutes.
Once you’ve done that, you’ve got yourself a brokerage account.
It’s then up to you to fund the account. After all, you can’t buy stocks if there’s no money in the account.
After there’s capital in the account, you should be able to make trades. Keep in mind, however, that stock trades are generally limited to market hours, with the New York Stock Exchange and the Nasdaq National Market both open from 9:30 a.m to 4:00 p.m. EST. (After-hours trading is a bit more complicated, and it’s outside the scope of this article).
But before you do any stock buying, you’ll want to make sure you know what you’re buying.
Think of the stock market like a market for anything else. Just like your local grocery store is a market of food, the stock market is a market of stocks. It’s just a place where you can buy merchandise (in this case, stocks).
And just like you wouldn’t blindly buy random groceries in random aisles at random prices, you most certainly shouldn’t be buying random stocks.
This is an opportunity to educate yourself. Knowledge is power.
Peter Lynch, a famous investor, once remarked on how people will spend all kinds of time researching an appliance for their home, but will then go out and buy a stock without a second of research.
If you want to be a successful long-term investor, you must first have the foundation of knowledge in place.
That means reading books on how to read financial statements, how successful businesses operate, and what great long-term investors have typically done.
I can say, though, that after doing my own fair share of reading back when I first started, I settled on dividend growth investing as the strategy that I’d use to build my wealth and passive income.
And as I noted earlier, this worked out fabulously.
Dividend growth investing basically involves buying and holding stock in high-quality businesses that reward their shareholders with increasing dividend payments.
These payments are funded from growing profit.
And that growing profit is realized because these businesses are able to sell more products and/or services, and they’re also able to increase the prices on these products and/or services because of demand.
High-quality businesses also use durable competitive advantages to protect their interests from competition.
You can find more than 800 US-listed dividend growth stocks by checking out David Fish’s Dividend Champions, Contenders, and Challengers list, which is an incredible compilation of stocks that have paid increasing dividends for at least the last five consecutive years.
You’ll find a lot of household names in this list, as would probably be expected.
Think blue-chip stocks like Johnson & Johnson (JNJ), Apple Inc. (AAPL), and McDonald’s Corporation (MCD).
If you’re looking to start soaking up the knowledge right away, fellow contributor Dave Van Knapp put together an excellent series of articles on dividend growth investing.
It’s an entire series of lessons on how dividend growth investing works and why it’s so valuable – and it’s great reading.
However, even once you’ve identified a stock to buy, you want to make sure you’re getting the right price.
Just like you go to the grocery store and look for the sales, you should adapt that mindset when it comes time to buy stocks.
In order to help readers on this front, I pen a series that covers an undervalued high-quality dividend growth stock every Sunday.
Finally, once you’re sure you’re ready to pull the trigger, it’s as simple as clicking on the appropriate tab/tool inside of your brokerage account in order to buy stock.
You’ll be asked the stock ticker, how many shares you want, and what kind of order you want to put in.
A market order means you’re going to buy the stock at the prevailing price (at that particular moment).
A limit order means you can set the price you’re willing to pay.
Successful and intelligent long-term investing is a bit more nuanced and complicated than I can get into via a short article like this, but these basics will at least get you moving in the right direction.
But the most important thing to keep in mind, Kenneth, is that compounding is the long-term investor’s best friend.
Well, compounding needs time to really work in one’s favor.
As such, the best time to start saving and investing is today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.