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How to Buy Stock for Your Investment Portfolio

Sebencapital

Published
13/01/24
How to Buy Stock for Your Investment Portfolio

Over the past couple of centuries, business ownership, including ownership of publicly-traded companies in the form of common stock, has been the most lucrative asset class for those wanting to build wealth. Despite the higher-than-average volatility, when you buy stock and earn the legal right to participate in the profits and losses of the enterprise, your money can grow in a way that simply isn't possible with bonds, certificates of deposit, or in some cases, even real estate.

For new investors and would-be investors, one of the more common questions asked involves how to buy stock. There are several different ways to start investing in stocks, each with its own advantages and disadvantages, including tax and liquidity considerations. Some popular options can help you gain a general lay of the land and be better informed to making decisions about equity acquisition.

How to Buy Stock in a Regular Brokerage Account

If you want to buy stocks without restrictions, tax advantages, or contribution limits, the easiest way is to open a brokerage account. Picking a brokerage involves deciding if you want a full-service broker or a discount broker that simply executes your stock trades at low prices. Nowadays, it's easy – just spend about five minutes answering some questions online.

Let's say you choose Charles Schwab, a big U.S. broker. You'd fill out the online form with your name, address, Social Security number, and job details. Depending on your choices, you might provide more info if you want features like margin debt or stock option trading. After that, you'd send in the minimum account balance or arrange for monthly deposits from a Schwab checking account.

Once your brokerage account is open, you'll see the cash waiting for you to use. Log in to the website, type in the company's ticker symbol, decide how many shares you want, and click to complete the trade. Within a second or two, you'll see the stock in your account and the cash gone. A few days later, you'll get a confirmation document. If the company pays a dividend, it goes straight to your brokerage account. If there's a tax-free spin-off or split-off, those shares also appear in your brokerage account.

How to Buy Stock in an IRA or Similar Retirement Account

Buying stocks in a Roth IRA or a similar account is pretty much the same as buying stocks in a regular brokerage account. If your IRA is with a brokerage firm, you follow the same steps. The key difference lies in how taxes are handled and the annual cash contribution limits.

For instance, you can contribute only ₹6,000 per year to a Traditional IRA if you're 49 or younger, and $7,000 if you're 50 or older. As long as you meet the income limits for the year based on your marital status, you can deduct these contributions as if you never earned that money.

Meanwhile, any dividends and capital gains your money makes while invested in stocks within the Traditional IRA are completely tax-deferred, with a few exceptions. When you withdraw the money, you pay regular income tax on the amount taken out.

Note

If you take money out of your Roth IRA too soon, you might face a 10% penalty fee, unless you qualify for an exception. Make sure to understand the rules before withdrawing cash.

How to Buy Stock Through a Direct Stock Purchase Plan

If you're not keen on opening a brokerage account, there's good news. Many companies, especially major ones like Exxon Mobil, offer programs that let you buy their stock directly. This can be free or at a significantly discounted price through the company's transfer agent. Take Exxon Mobil, for example; it has a direct stock purchase plan with Computershare. By opening an account with $250 or agreeing to a $50 monthly withdrawal from your bank, you can purchase the stock without paying any commissions.

What's even better is that these plans often allow you to buy fractional shares. This means you can invest every penny, even if you don't have enough to buy a full share. When applying online, you can choose whether you want your dividends deposited into your bank account or reinvested in more shares. The decision is crucial, as there's a notable impact on your long-term financial situation and the stock's performance. So, think carefully about whether to reinvest your dividends or not.

How to Buy Stock Through an Employee Plan

Employee stock options are a valuable but often overlooked perk in many companies. Through employee stock purchase plans (ESPPs), big companies offer their employees the chance to own company stock at a discounted price, often up to 15% less than the market value.

To get in on this benefit, you typically need to visit the human resources department and request an enrollment form. Fill it out, indicating how much of your paycheck you want to set aside for buying company shares. Instead of receiving that portion of your earnings, the money is used to purchase stock at a lower price than what you'd pay through a brokerage. For example, with a 15% discount, you could snag a $100 stock for just $85, instantly pocketing a $15 profit. It's a smart way to become a part-owner of the company and potentially make some extra money.

How to Buy Stock Through a Mutual Fund

If you're not into choosing individual stocks but still want to invest in the stock market, a great option is a mutual fund, especially a low-cost index fund. Here's how it works in simple terms: you give money by writing a check or having it taken from your bank account, and your cash joins with other investors' money. Skilled managers then use that pooled money to buy a variety of stocks on your behalf. These stocks are held together in a consolidated portfolio, and you own shares of that portfolio.

When you invest in a mutual fund, you'll indirectly pay a portion of the fund's costs, known as the mutual fund expense ratio, in addition to any commissions. If you're considering an S&P 500 index fund, you can open an account directly with the mutual fund company or use your stockbroker to buy shares through your brokerage account. Be aware that using a stockbroker might involve commissions, whereas the mutual fund company typically doesn't charge them for their in-house funds. The fund divides your investment dollars among stocks based on market capitalization, meaning more money goes to stocks with higher overall market value. It's a straightforward way to own a piece of the stock market without the hassle of picking individual stocks.

Note

Market capitalization is the total value of a company in the stock market. You get this number by multiplying the current share price by the total number of shares available for trading. In simple terms, it's how much the entire company is worth based on its stock value.

When you add more shares to your mutual fund by sending money or setting up electronic transfers from your bank, and when you automatically reinvest mutual fund payouts, you're essentially buying stocks indirectly. The shares you own in major companies are just as genuine as if you had them directly in your brokerage account. The only difference is that there's a legal middleman providing benefits like cost efficiency and diversification.

How to Buy Stock Through a 401(k) Plan

Unless you manage your own 401(k) at a brokerage firm, you'll likely need to choose from a selection of mutual funds provided by your employer to invest in stocks indirectly. Your company's human resources department can assist you in setting up your account, securing any free matching funds available, and ensuring your contributions go to the funds that best suit your goals.

Typically, a good 401(k) plan will offer various funds, such as those focused on large-cap stocks, small-cap stocks, and international stocks. For example, if your plan includes the Vanguard Total International Stock Index Fund, the top 10 holdings would make up 9.3% of your assets and include companies like Nestle in Switzerland, Toyota in Japan, and Alibaba Group in China. By choosing this fund in your 401(k), you're essentially investing in all these businesses and more.

How to Buy Stock in an International Company

If you're a U.S. investor looking to buy shares of a company located outside the country, you can do it in a few ways. Apart from investing in mutual funds focused on international markets, most of these methods involve using your brokerage account.

Buy on the NYSE

If a foreign stock is listed on a U.S. stock exchange like the New York Stock Exchange, you can purchase its shares using the ticker symbol, just like you would for any U.S. company. For instance, the British alcohol company Diageo PLC is traded under the ticker symbol DEO in the U.S.

Buy ADS Shares

If a foreign stock has American depositary receipts (ADRs) or American depositary shares available, you can buy them in the U.S. using the ADS ticker symbol. However, this is a complex topic with currency risks and potential foreign withholding taxes, making it less suitable for most new investors. As an example, Nestle trades on the pink sheets in the U.S. under the symbol NSRGY. These are like trust funds created by Citibank for American investors, holding the actual Nestle shares in Zurich, Switzerland.As of October 2021, 1 US dollar is equivalent to approximately 74 Indian rupees. Please note that exchange rates are subject to change and may vary depending on the time and place of conversion.

Go With an International Brokerage Account

You have the option to open a special kind of brokerage account that allows you to trade globally. Several big brokers offer this service. With a global trading account, you can hold different currencies and buy stocks directly on foreign markets. However, keep in mind that this choice can be more expensive, with commissions sometimes reaching several hundred dollars and minimum purchase requirements often set at tens of thousands of dollars in U.S. equivalent currency per trade.

Note

Investing internationally can be riskier because there are more things to consider, like social and political issues and foreign currencies. Make sure you understand these extra factors and risks before you decide to invest internationally.

The Bottom Line

There are various ways to buy stocks, like setting up a family partnership through a limited liability company or negotiating directly with someone who owns shares. However, these methods are uncommon for most investors. Typically, people buy stocks through a stockbroker, a mutual fund company, or an employer-sponsored retirement plan like a 401(k) or 403(b).

The key to success is to find good companies, pay a reasonable price (or use dollar cost averaging if you're unsure), and follow the strategy of wealthy families by minimizing portfolio turnover. This helps avoid extra expenses and allows you to benefit from deferred tax assets, potentially increasing your returns over time.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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