Before You Buy Your First Stock

This lesson is general education about U.S. personal finance, not financial, tax or investment advice. Tax rules and limits change every year; check IRS.gov or a qualified professional for your situation.

Placing a first stock purchase takes about a minute on a brokerage app, which is exactly why a checklist helps. A share of stock makes you a part owner of a real company, and the price can move against you without warning. Work through the items below before you confirm any order. If you have not opened an account yet, getting started with your first brokerage account covers that step first.

Know Exactly What You’re Buying

A stock is not an abstract ticker symbol. Run through these before anything else:

• A share is a piece of the business. When you own stock, you own part of the company that issued it. Companies sell shares to raise money they can use to grow, and after that first sale, investors trade the shares back and forth on the stock market.
• Common or preferred. Common stockholders can vote on company matters at shareholder meetings and collect dividends. Preferred stock usually skips voting rights, but preferred holders get dividends first and stand ahead of common holders when a failed company’s assets get divided up.
• Why prices move. Prices move mostly on what investors expect the company to earn, so when expectations shift, the price can shift quickly.
• The downside. A share price can fall, even to zero. If a company fails, shareholders stand near the end of the repayment line and may get little or nothing back.

Check How the Company Makes Money

If you cannot describe how a company earns money in a sentence or two, that is a sign to hold off and learn more first. These questions help:

• What does it sell, and to whom? Look past the ticker to the products or services that actually generate revenue.
• What kind of stock is it? Growth stocks are companies whose earnings are expanding faster than the market average; they rarely pay dividends, and buyers hope the share price climbs. Income stocks pay steady dividends, and an established utility company tends to fit this mold. Value stocks trade at a low price-to-earnings ratio, meaning they cost less relative to profits, and the low ratio can signal investors have cooled on the company for some reason.
• Does the style fit you? If steady income matters to you, a company that rarely pays dividends may not be the right first purchase.

Decide How Much You Can Afford to Risk

Before you reach the order screen, settle the money question:

• Use money you can leave alone. Prices fall as well as rise, and a single company’s stock can stay down for a long time.
• Cover the basics first. An emergency fund comes before stock purchases. The habit of paying yourself first builds that cushion on a schedule, before investing gets the leftovers.
• Weigh the broader option. Owning one company is a concentrated bet. Index funds in plain English explains a way to own many companies at once, which many first investors use as their starting point.

Choose Your Order Type: Market or Limit

The price on the screen may not be the price you pay. Quotes can be delayed, trades take time to execute, and in volatile markets prices can swing sharply. The order type you pick gives you some control:

• Market order. The most common type, and what most firms use unless you specify otherwise. It has no price restrictions, so it is the most likely to go through, and it usually executes close to the current bid or ask while regular trading is open, 9:30 a.m. to 4 p.m. Eastern Time. The risk is price: in a fast-moving market, you might not get the price you were quoted.
• Limit order. You set the price. A buy limit order fills only if the stock is available at your limit or below, and a sell limit order only at your limit or above, so a fill can only match or beat your price. The catch is execution: if the market never reaches your price, the order may not fill at all, and limit orders can carry higher execution costs than market orders.
• Orders outside normal hours. If you place an order before or after normal trading hours, news events or other factors can move the price significantly by the time the market opens again.

Watch out

A stop order, which triggers a trade once a stock reaches a price you set, converts into a market order the moment it triggers. In a volatile market the fill can land far from your stop price, and some stock exchanges have stopped accepting stop orders altogether.

Pick a Time Limit for Your Order

An unfilled order needs instructions on how long it stays alive:

• Day order. The simplest option. The firm keeps working the order through the current trading day, and whatever has not filled cancels when the day ends. You have to ask separately for the order to work in extended hours.
• Extended hours. Trading outside regular hours may not be available for all order types and carries its own risks, such as lower liquidity and higher volatility.
• Good ‘til canceled. A GTC order stays active for a set period unless you cancel it. Firms cap how long these orders stay active, often for months past the day you place them, so note the expiration date.
• At the open or close. Market-on-open and market-on-close orders target the 9:30 a.m. ET open or the 4 p.m. ET close. These generally need to be in at least two minutes before the open or close, and after that deadline they usually cannot be changed or canceled.

Know the Costs Before You Confirm

A few minutes with the fee schedule can save real money:

• Read the firm’s fee schedule. Charges for trades, account maintenance and other services vary, and the schedule tells you the cost of this trade before you place it.
• Ask how the firm gets paid. Different firms earn money in different ways, and knowing the structure helps you judge the costs you are being shown.
• Consider buying straight from a company. Some companies let you buy or sell their stock directly through them, without a broker. Others limit these plans to employees or existing shareholders, and some require minimum purchase amounts.
• Understand dividend reinvestment plans. These plans turn your dividend payments into more shares of a stock you already own, and you sign an agreement with the company to set one up. Ask the company or your firm whether the service carries a charge.

Read Your Trade Confirmation and Check for Red Flags

After the order fills, the confirmation arrives in your account. Read it the same day:

• Match it against your order. Compare every detail to what you entered, from the share count to the price to the timing and each charge. If anything differs, contact the firm right away.
• File it for tax season. If selling shares in a taxable account affects your taxes when you file, you will want these records on hand, so keep the confirmation with your tax paperwork.

Then run a final check on the trade and the firm:

• Check who you’re dealing with. Before any money changes hands, look up the background of the firm and the individual selling you investments. Free research tools from regulators can help, and our guide on how to check a broker or financial adviser walks through the steps.
• Pressure and promises. Urgency to buy now, or claims of guaranteed returns, should end the conversation. A share price can drop all the way to zero, so nobody can promise a return.
• Charges that do not match the schedule. A fee you cannot find on the firm’s published schedule deserves an explanation in writing before you act.
• Anything you cannot explain. If you cannot say, in plain words, why you are buying this company at this price in this order type, cancel the order and take more time.

Common questions

What is the difference between a market order and a limit order?

A market order goes through right away at close to the current price during regular trading hours, though the final fill can differ from the quote you saw. A limit order fills only at your price or better, which controls cost but means the trade may never execute.

How much money do I need to buy my first stock?

There is no fixed minimum, and some companies sell shares directly with minimum purchase amounts. What matters more is using money you can leave invested, after your emergency fund is in place.

What should a trade confirmation show?

It describes the trade, so check that the security, the share count, the price, the timing and any charges match the order you entered. Keep it with your tax paperwork in case selling shares in a taxable account has tax consequences when you file.

Why might a limit order never go through?

A buy limit order fills only when the stock is available at your limit price or below. If the market price never reaches your limit while the order is active, the order does not execute.