You need a brokerage account before you can buy any stock

Stock investing starts with opening an account at a brokerage firm — a company licensed to buy and sell securities on your behalf. You cannot walk into a bank and buy Apple stock directly. You open an account with a brokerage (examples: Fidelity, Charles Schwab, E*TRADE, Vanguard, or your bank's brokerage arm), fund that account with money, and then place orders through their platform.

The account opening process takes 10 to 15 minutes online. You provide your name, address, Social Security number, employment status, and banking details. The brokerage runs a background check and verifies your identity. Most accounts are approved within one business day. You then link a bank account and transfer money in — this usually takes three to five business days to settle.

Different account types exist for different purposes. A taxable brokerage account has no contribution limits and no restrictions on when you withdraw money, but you pay taxes on dividends and capital gains each year. A retirement account (like an IRA or 401(k)) has annual contribution limits but offers tax advantages — you either pay no taxes on gains until withdrawal, or pay no taxes on withdrawal at all, depending on the account type. Most people starting out open a taxable account first, then add a retirement account later.

Key Takeaways

  • You must open a brokerage account with a licensed firm before you can buy stocks; this takes 10 to 15 minutes online and approval usually comes within one business day.
  • Money transferred from your bank account to your brokerage takes three to five business days to settle, so plan ahead before you want to buy.
  • You can buy individual stocks (shares of one company) or funds (baskets of many stocks), and funds carry less risk because losses in one company are offset by gains in others.
  • Every stock purchase and sale is taxed; in a taxable account you owe taxes on gains each year, while retirement accounts defer or eliminate taxes depending on the type.
  • Stock prices move constantly during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays), and the price you pay depends on when you place your order.

Individual stocks versus funds: what the difference means for your money

Once your account is funded, you choose what to buy. An individual stock is a share of one company — you own a tiny piece of that business. A fund is a basket of many stocks bundled together. An index fund, for example, might hold 500 stocks representing the entire U.S. market.

Individual stocks require research. You read financial statements, track company news, and make a bet that the stock will rise. If you pick wrong, that one stock can fall 50 percent or more. If you pick right, it can double or triple. The risk and potential reward are both large.

Funds spread risk across many companies. If one company in the fund fails, the loss is diluted by gains in the other 499. Most funds are managed by professionals or built to track an index automatically. Funds charge a small annual fee (often 0.03 to 0.20 percent of your account balance per year) but require far less research from you. For most people starting out, funds are the safer choice.

How to place an order and what happens next

Once you decide what to buy, you log into your brokerage account and enter an order. You specify the stock or fund symbol (like AAPL for Apple), the number of shares, and the order type. A market order buys immediately at whatever the current price is — it executes within seconds during market hours. A limit order buys only if the price drops to a specific level you set; it may never execute if the price never reaches that level.

The order executes during market hours (9:30 a.m. to 4 p.m. Eastern time, Monday through Friday). If you place an order after 4 p.m., it waits until the market opens the next day. The price you pay is the market price at the moment your order reaches the exchange — not the price you saw on your screen five minutes earlier. This is called execution risk, and it is why limit orders exist: they protect you from buying at a price higher than you intended.

After the order executes, the shares appear in your account within one business day. You now own them. You can hold them for decades, sell them tomorrow, or sell them in 10 years — there are no rules about how long you must keep them. Every time you sell, you owe taxes on the gain (or can deduct the loss) in that tax year.

Understanding costs: commissions, fees, and taxes

Most brokerages charge zero commission per trade — you can buy or sell stocks without paying a per-transaction fee. This was not true 20 years ago; commissions were $5 to $10 per trade. Today, the cost of buying one share is the same as buying 1,000 shares: nothing.

Funds charge an annual expense ratio, a small percentage of your account balance taken each year to cover management and administration. A fund with a 0.10 percent expense ratio costs $10 per year on a $10,000 investment. A fund with a 1.0 percent ratio costs $100 per year on the same $10,000. Over decades, this difference compounds — a 0.10 percent fund will grow far larger than a 1.0 percent fund, all else equal. Check the expense ratio before you buy any fund.

Taxes are the largest cost most investors face. When you sell a stock for more than you paid, you owe capital gains tax. When a fund pays you a dividend (a share of company profits), you owe tax on that dividend in the year you receive it, even if you do not sell the fund. The tax rate depends on how long you held the investment and your income level. Long-term capital gains (stocks held over one year) are taxed at lower rates than short-term gains. This is why most investors hold stocks for years rather than months.

How to research stocks and funds before you buy

Your brokerage platform includes research tools: company financial statements, analyst ratings, price charts, and news feeds. Start there. Read the company's annual report (the 10-K filing, available free on the SEC website). Look at revenue, profit, and debt. Compare the company to competitors. Read recent news.

For funds, check the fund's fact sheet, which lists all the holdings (the stocks inside the fund), the expense ratio, and the fund's performance over the past 1, 5, and 10 years. Compare similar funds side by side. A fund tracking the S&P 500 index should have nearly identical performance to other S&P 500 index funds, so choose the one with the lowest expense ratio.

Many investors use screening tools to narrow choices. A stock screener lets you filter by price, industry, profit margin, or dividend yield. A fund screener lets you filter by asset class, expense ratio, or performance. These tools are free on most brokerage sites and on financial websites like Yahoo Finance or Morningstar.

Risk, diversification, and how much to invest

Stock prices fall as well as rise. A stock you buy today might be worth 20 percent less in six months. A fund tracking the entire U.S. market fell roughly 50 percent during the 2008 financial crisis and took years to recover. This is normal. If you cannot afford to lose the money, do not invest it in stocks.

Diversification means spreading your money across many different stocks, industries, and asset types so that no single loss can wipe you out. The simplest way to diversify is to buy a broad index fund — one fund that holds hundreds or thousands of stocks. This is far easier and safer than picking 20 individual stocks yourself.

How much to invest depends on your financial situation. Most financial advisors suggest building an emergency fund (three to six months of living expenses in a savings account) before you invest in stocks. Then, invest money you will not need for at least five years, because stocks are volatile in the short term but tend to rise over long periods. Start small if you are new to investing — $100 or $500 to learn how the platform works — then increase as you gain confidence.

What happens when you want to sell or withdraw money

Selling is the reverse of buying. You log in, enter a sell order for the number of shares you want to sell, and the order executes at market price. The cash appears in your brokerage account within one business day. You can then transfer that cash back to your bank account; this takes three to five business days.

If you sell for more than you paid, you owe capital gains tax on the profit. If you sell for less, you can deduct the loss against other gains or, in some cases, against ordinary income. Keep records of what you paid (the cost basis) and when you bought and sold, because you will need this information for your tax return.

There are no penalties for withdrawing money from a taxable brokerage account at any time. Retirement accounts (IRAs, 401(k)s) have withdrawal restrictions — you generally cannot withdraw before age 59½ without paying a 10 percent penalty plus income tax, with some exceptions. This is why most people keep taxable and retirement accounts separate.

Common mistakes new investors make

Trying to time the market — selling before a crash and buying before a rally — almost never works. Professional investors with decades of experience cannot do it consistently. You will almost certainly buy high and sell low if you try. Instead, invest regularly (the same amount each month) regardless of price. This is called dollar-cost averaging, and it removes emotion from the decision.

Chasing performance is another trap. You see a stock that rose 200 percent last year and buy it, expecting the same return. It then falls 50 percent. Past performance does not predict future results. A boring index fund that rises 8 to 10 percent per year will make you far more money over 30 years than a hot stock that crashes.

Holding too much cash in your brokerage account is wasteful. Cash earns little to no interest. If you have decided to invest, invest the money rather than letting it sit idle. But do not invest money you might need in the next few years — keep that in a savings account instead.

Frequently Asked Questions

Can I start investing with just $100?

Yes. Most brokerages have no minimum account balance. You can open an account and buy a single share of a stock or a fractional share of a fund with $100. Starting small is a good way to learn how the platform works before you invest larger amounts.

What is the difference between a stock and a bond?

A stock is ownership in a company; you profit if the company grows and loses if it shrinks. A bond is a loan you make to a company or government; they pay you interest and return your principal on a set date. Stocks are riskier but have higher long-term returns. Bonds are safer but return less.

Do I have to pay taxes on stocks I hold but do not sell?

Not on the gains themselves. You owe taxes only when you sell (on the gain) or when the fund pays a dividend (on the dividend). If a stock you own rises 50 percent but you never sell, you owe no tax that year. You will owe tax when you eventually sell or when you die and your heirs inherit it.

What happens if the brokerage goes out of business?

Your stocks and funds are protected. Brokerages are required to hold customer securities separately from their own assets. If a brokerage fails, your holdings are transferred to another brokerage. Cash in your account is insured up to $250,000 by the SIPC (Securities Investor Protection Corporation).

Should I invest in individual stocks or index funds?

Index funds are the safer choice for most people, especially beginners. They require less research, carry lower risk through diversification, and have lower fees. Individual stocks can outperform, but they require significant research and carry higher risk. Many experienced investors use both: a core holding in index funds plus smaller positions in individual stocks they have researched.