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 mission-critical to your success.
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Make Sure You Have Your Financial Ducks in a Row for Individual Stocks
Experienced individual stock investors already know this, but if you’re new to investing, you’ll need to diversify. Invest no more in individual stocks than you can afford to lose. Put another way, be sure you have most of your portfolio in other assets.
- 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%.
- Also 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.
Now let’s move on to the topic at hand: how to buy individual stocks.
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:
- Bid, ask and spread: The bid is the price buyers are willing to pay for a stock. The ask is the price sellers are willing to accept for it. The spread is the difference between the two.
- 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.
Make Sure You Know What You’re Investing In
That includes both the company you want to buy stock in and the industry it operates in. Before buying any stock, you should first thoroughly research the company. 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 company that’s more innovative 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.
There are a number of metrics you can use to compare a company to its competitors. For example, you can use P/E ratio. 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.
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.
Buying a Individual Stocks
The first step is to choose a brokerage firm where you can buy, hold, and sell your stocks. We provide a list of brokers below, but here we’ll discuss the mechanics of buying a stock.
Brokers today operate entirely online. This means you can execute trades from your home, office or mobile device in a matter of minutes. You’ll need to do your company research in advance, but the actual process of buying a stock is easier than ever.
- 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. When you enter your order, decide whether you want to place a market order or a limit order, as well as the dollar amount you want to invest in that particular stock. If you execute a market order, the trade will be instantaneous. But if you use a limit order, the trade may not take place for several days, until the specified price is reached.
- Diversify your stock holdings. 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.
Where to Buy Individual Stocks
If you’re interested in buying individual stocks, there’s a large number of investment brokers to choose from. We present several because each investor has his or her own trading style. Each of the brokers listed below 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 offer 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.
Ally Invest Individual Stocks
- Minimum investment: $0
- Commissions on stock trades: $4.95 per trade, but $3.95 per trade if you execute at least 30 trades per quarter or maintain a balance of $100,000 or more.
- Customer service: Phone, email and chat 24/7
- Current promotions: Up to $3,500 in bonus cash, plus 90 days of commission-free trades.
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 fees. And if you’re a frequent trader, commissions are even lower.
Another big 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.
TD Ameritrade Individual Stocks
- Minimum investment: $0
- Commissions on stock trades: $6.95 per trade
- Customer service: Phone, live chat, text, and email 24/7
- Current promotions: Get up to $600 and trade free for 60 days.
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.
Charles Schwab Individual Stocks
- Minimum investment: $0
- Commissions on stock trades: $4.95 per trade
- Customer service: Phone, live chat and email 24/7, plus more than 300 local branches nationwide.
- Current promotions: None
Charles Schwab is the largest investment broker in the world, and there are a lot of good reasons for that. It’s the original discount brokerage firm, except that it’s now also a full-service investment platform. Schwab requires no minimum initial investment, it has every type of investment available, and it’s trading fees are at the lower end of the industry range. The company also has a customer service that sets the industry standard.
Fidelity Individual Stocks
- Minimum investment: $0
- Commissions on stock trades: $4.95 per trade
- Customer service: Phone and live chat 24/7, plus nearly 150 local branches nationwide.
- Current promotions: None
Best known for its mutual funds at one time, Fidelity has become the second-largest investment brokerage firm in the world. It’s comparable to Schwab, its primary competitor, in regard to fees, platform capability, customer service, and investment product offerings.
E*TRADE Individual Stocks
- Minimum investment: $500
- Commissions on stock trades: $6.95 per trade, but $4.95 per trade if you make at least 30 trades per quarter.
- Customer service: Phone, email and live chat 24/7
- Current promotions: Get up to $600 cash and trade free for 60 days.
E*TRADE isn’t the lowest-cost broker, but it does have 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.
Merrill Edge
- Minimum investment: $0
- Commissions on stock trades: $6.95 per trade
- 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. Though it’s trading fees aren’t the lowest in the industry, it’s trading platform and customer support are among the best. And it has special perks for Bank of America customers.
Firstrade Individual Stocks
- Minimum investment: $0
- Commissions on stock trades: $0 per trade
- Customer service: Phone and email during regular business hours only.
- Current promotions: Get a $200 transfer rebate when you move your account from another broker.
Firstrade has the major advantage of having the lowest trading fees in the industry – zero! Hard to believe but true. Of course, that comes with a trade-off. Firstrade doesn’t offer the level of customer assistance or platform support that you’ll get with full-service brokerages. This is an investment broker designed for knowledgeable self-directed investors who are looking to avoid trading costs. It also enables you to trade in penny stocks, which are rapidly being discontinued, other brokers.
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.
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 until 2020.
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.
Individual Stocks Final Thoughts
In an investment world where fund investing – particularly index funds – is becoming increasingly popular, buying individual stocks seems to be becoming a bit of a lost art. If you’re going to buy individual stocks, be sure you fully understand the companies you’re investing in.
Always make sure you have plenty of other investments for diversification purposes. And if you are a new investor or one with very little experience, keep the individual stock portion of your portfolio to a comfortable minimum.
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