6) Stocks Basics: Buying Stocks

by · August 25, 2010

By now you already have knowledge of what a stock is and the principles behind the stock market. The next step in this tutorial is to introduce you on how to buy stocks. If you’ve ever seen movies about stock market trading and was shocked how people were shouting and screaming “buy” or “sell” down at the trading pit, don’t be alarmed. Thankfully, you don’t have to do that.

There are two main ways to purchase stock: through a brokerage or directly from the company.

Buying Through a Brokerage

One of the most popular method to buy stocks is through a brokerage. As the name implies, the brokerage acts as an intermediary between you and the seller of the stocks. The brokerage is responsible for the necessary paperwork, signatures, the collection of money and all the other things required to trade stocks. In return, the broker will ask for a fee or payment for the services.

Brokerages come in two different flavors: Full-service and Discount brokerages.

For a full-service brokerage they offer you expert advice and can manage your account if you wish them to, but the cost of this type of brokerage is expensive. Normally, only the wealthy can afford to hire full-service brokers since they charge a lot. Even at one point back in time, only full-service brokers were available and thus access to the stock market was fairly limited to the rich and the privileged in society.

A discount brokerage offers discounted or cheaper commissions for their service. The disadvantage is that they could care less about what you do with your stocks. A discount broker’s main job is only to facilitate in the trading of stocks. They offer little in the way of personal attention to their clients, such as offering investment advice. The popularity of discount brokerages came with the advent of the Internet. Today, more people can easily invest in the stock market.

DRIPs & DIPs
Dividend Reinvestment Plans (DRIPS) and Direct Investment Plans (DIPS) are plans offered by companies that allow the investors, or shareholders, the option to buy stock directly from the company. Most DRIPs are discounted at a lower rate from the current share price and commission-free, thus it is an excellent way to invest money and make more profit.

Next Section: How to Read a Stock Quote