How to Buy and Own Stocks
What you actually do when you buy a stock
When you buy a stock, you own a piece of a company. You give money to a brokerage — a firm licensed to buy and sell stocks on your behalf — and they execute the trade on an exchange like the New York Stock Exchange or NASDAQ. You then own that share (or fractional share, depending on the brokerage) until you sell it. The company does not know you own it; the exchange's records do.
The process takes three steps: open an account with a brokerage, deposit money, and place an order. The order executes almost instantly during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays). You own the stock immediately, though the settlement — the actual transfer of money and shares — takes two business days. During those two days, you can already sell the stock if you want to.
You pay the brokerage a commission, which used to be $5 to $10 per trade but is now zero at most major brokerages. You may pay a bid-ask spread (the tiny difference between what buyers will pay and what sellers want), which is typically a few cents per share. You do not pay the company whose stock you bought.
Key Takeaways
- You buy stocks through a brokerage account, which you can open online in minutes with a Social Security number, address, and initial deposit.
- Most brokerages charge no commission, but you pay a small spread (the difference between buy and sell prices) on each trade.
- Stock prices move throughout the day; you can place a market order (buy at today's price) or a limit order (buy only if the price hits a specific number).
- You can buy whole shares or fractional shares, and you can set up automatic monthly investments if you want to buy regularly without thinking about it.
- Stocks held in a regular taxable account are taxed on gains when you sell; stocks in a 401(k) or IRA are taxed differently or not at all until withdrawal.
Opening a brokerage account
You need a brokerage account to buy stocks. Major brokerages include Fidelity, Charles Schwab, E*TRADE, Vanguard, and Interactive Brokers, though there are dozens of others. You can open an account online in 10 to 15 minutes. You will need your Social Security number, a valid ID, your address, and your employment status. Most brokerages ask for an initial deposit, though some have no minimum.
When you open the account, you choose the account type. A taxable brokerage account is the simplest: you can buy and sell anything, withdraw money anytime, and you pay taxes on gains when you sell. A 401(k) is an employer-sponsored retirement account where contributions reduce your taxable income that year, and you do not pay taxes on gains until you withdraw after age 59½. An IRA (Individual Retirement Account) is a personal retirement account with similar tax benefits; the two main types are Traditional (contributions may be tax-deductible) and Roth (contributions are not deductible, but withdrawals are tax-free). Most people start with a taxable account or a 401(k) if their employer offers one.
After you open the account, you link a bank account and deposit money. This takes one to three business days. Once the money is in your brokerage account, you can buy stocks immediately.
Placing an order to buy
To buy a stock, you search for it by ticker symbol (a one- to five-letter code: AAPL for Apple, MSFT for Microsoft, TSLA for Tesla) in your brokerage's app or website. You then choose how many shares you want and what type of order to place.
A market order buys at the current market price, whatever that is right now. If Apple is trading at $150 and you place a market order for 10 shares, you will pay approximately $1,500 (plus the spread). Market orders execute almost instantly during market hours. A limit order lets you set a maximum price: you say "buy 10 shares of Apple, but only if the price drops to $145 or lower." The order sits in the system until the price hits that level, then executes automatically. Limit orders can take days or weeks to execute, or may never execute if the price never reaches your target.
Most brokerages now let you buy fractional shares, meaning you can invest a specific dollar amount rather than a whole number of shares. If you have $500 and Apple is $150 per share, you can buy $500 worth (3.33 shares) instead of being forced to buy either 3 shares ($450) or 4 shares ($600).
What happens after you buy
Once your order executes, you own the stock. Your brokerage account shows your holdings, the price you paid, the current price, and your gain or loss. You can sell anytime during market hours by placing a sell order the same way you placed a buy order.
If the company pays a dividend (a cash payment to shareholders, usually quarterly), the money goes into your brokerage account automatically. You can withdraw it or reinvest it by buying more shares. Some brokerages offer dividend reinvestment plans (DRIPs) that automatically buy more shares with your dividends, compounding your investment without you having to do anything.
You do not have to do anything else. You do not have to monitor the stock daily, and you do not have to sell when the price drops. Many investors buy stocks and hold them for years or decades.
Understanding taxes on stocks
In a taxable brokerage account, you owe taxes on gains when you sell. If you bought Apple at $100 and sold at $150, your gain is $50 per share. The tax rate depends on how long you held the stock. If you held it for more than one year, it is taxed as a long-term capital gain, which is usually 0%, 15%, or 20% depending on your income. If you held it for one year or less, it is taxed as a short-term capital gain, which is taxed like ordinary income (your regular tax bracket, which could be 10% to 37%).
In a 401(k) or Traditional IRA, you do not pay taxes on gains while you hold the stock. You pay taxes on the entire amount you withdraw after age 59½, at your ordinary income tax rate. In a Roth IRA, you do not pay taxes on gains ever, as long as you follow the withdrawal rules (generally, you can withdraw after age 59½ and the account has been open for at least five years).
If you sell at a loss, you can deduct up to $3,000 of losses against your ordinary income in a given year. Losses beyond that carry forward to future years. This is called tax-loss harvesting, and it is a way to reduce your tax bill.
Setting up automatic investments
Most brokerages let you set up automatic monthly or weekly investments. You choose a stock (or a fund), a dollar amount, and a date, and the brokerage buys that amount automatically on that date. This is called dollar-cost averaging: you invest the same amount regularly regardless of price, which means you buy more shares when the price is low and fewer when it is high. Over time, this can reduce the impact of buying at the wrong time.
Automatic investing is useful if you want to build a position slowly without thinking about it, or if you want to invest a bonus or tax refund over several months instead of all at once. You can pause or cancel automatic investments anytime.
Common mistakes to avoid
Do not buy a stock because you heard about it on social media or because a friend made money on it. Do not assume past performance predicts future results. Do not buy on margin (borrowed money) unless you understand that you can lose more than you invested. Do not panic-sell when the price drops; stocks are volatile, and drops are normal.
Do not put all your money into one stock. Do not buy stocks you do not understand. Do not check your account balance every day; it will fluctuate and can make you anxious. Do not try to time the market (buy low, sell high) — most people who try to do this lose money to trading costs and taxes.
Do not confuse a stock with a bond or a fund. A stock is one company; a fund (mutual fund or ETF) is a basket of many stocks or bonds. If you want to own many companies at once with less risk, a fund is usually better than picking individual stocks.
Frequently Asked Questions
Can I lose more money than I invested?
In a regular stock purchase, no. The worst case is the stock goes to zero and you lose your entire investment. If you buy on margin (borrowed money), yes, you can lose more than you invested because you owe the brokerage back the borrowed amount plus interest.
What is the difference between a stock and a mutual fund?
A stock is one company. A mutual fund is a basket of many stocks (or bonds) managed by a professional, and you own a share of that basket. Funds spread your risk across many companies; stocks concentrate it in one. Most beginners benefit from starting with funds rather than individual stocks.
Do I have to sell my stocks eventually?
No. You can hold stocks forever. Many investors buy stocks and never sell them. You only owe taxes on gains when you sell, so holding long-term can reduce your tax bill. You can also pass stocks to heirs in your will.
What happens if the company goes bankrupt?
Your stock becomes worthless. You lose your entire investment in that stock. This is why diversification (owning many stocks or funds) matters: one bankruptcy does not wipe out your whole portfolio.
Can I buy stocks in a company I work for?
Yes, but be careful. Many employers offer employee stock purchase plans (ESPPs) at a discount, which can be a good deal. However, owning your employer's stock concentrates your risk: if the company struggles, you lose both your job and your investment. Most financial advisors suggest limiting company stock to a small part of your portfolio.