How to Start Investing in Stocks: A Simple First Plan

Step 1: What is this money for?

Before you pick a stock, write down what the money is for and when you might need it. Money for next month's rent has a very different job from savings for retirement in 30 years.

Share prices can fall a lot, and they can fall at a bad moment. If you might need the money soon, a fall could force you to sell at a loss. That is why it helps to keep an emergency fund in cash and to deal with expensive debt before you invest.

Ask yourself two different questions. Can I stand watching my money fall? And can I afford it if it falls? You might feel brave but have an unsteady income or a big bill coming. The second question matters more.

A long time before you need the money gives you room to wait. But it does not make a single company safe.

Step 2: Should you buy one stock or a fund?

A share is a piece of one business. A stock fund, such as an ETF (exchange-traded fund) or a mutual fund, holds shares in many companies. When you buy the fund, you own part of the fund.

A broad fund spreads your money, but a fund that holds only one industry can still be a narrow bet. Read the fund's holdings and goal before you call it diversified. The SEC, the US markets regulator, has a guide to funds that explains how fund shares work.

Also, a $20 share is not cheaper than a $200 share in any useful way. Our lesson on market capitalization shows why.

Step 3: How do you choose a broker and account?

A broker is the firm that buys and sells shares for you. Compare the investments it offers, its fees, its currency charges, its fees for moving your account and its help options.

Then check that the firm is registered where you live. Look up the legal company, not just the app's name:

• US: FINRA BrokerCheck
• Canada: the CSA National Registration Search
• UK: the FCA Firm Checker and Register
• Australia: ASIC's professional registers

In the US, you usually choose between a cash account and a margin account. A margin account lets you borrow from the broker, which can make losses bigger. Some apps set up margin unless you choose otherwise. The SEC's guide to opening an account explains the choice.

Some accounts have tax benefits. Examples are an IRA in the US, a TFSA or RRSP in Canada and a stocks and shares ISA in the UK. Who can use them, and how much you can add, depends on your country and situation. Check the official rules for your own case.

Step 4: How much will the purchase really cost?

Say you have $600 to invest. A fund costs $48 a share, and your broker charges a $4 commission for each order. You want whole shares.

• 12 shares cost $576, plus $4, so $580. You have $20 left.
• 13 shares cost $624, plus $4, so $628. That is more than your $600.

If the fund is listed in another currency, add the cost of changing your money. For example, a 1.5% conversion charge on $600 is $9. The fund also takes its own yearly fee from inside the fund. A "zero commission" advert tells you nothing about these other costs.

Some brokers also sell parts of a share. See fractional shares and our brokerage fee worksheet.

Step 5: How do you place your first order?

Before you press buy, check six things:

• the company or fund name
• the ticker, the short code for the share
• the currency
• how many shares
• which account
• whether the market is open

A market order buys right away at the best price available. It does not promise a price. A limit order sets the most you will pay. It protects your price, but it may never fill.

In our example, a limit order at $47 for the $48 fund will only fill if a seller accepts $47. If it does not fill, stay calm. Don't raise your limit just to get the trade done.

After the trade, compare the confirmation with what you meant to do, and keep a copy. In the US and Canada, the trade then settles one business day later. Learn more in market, limit and stop orders and stock settlement.

Step 6: What do you do after you buy?

Your first purchase is only the start. Decide how much you can add each month without stretching your budget. Adding the same amount on a schedule makes the habit easier to keep. It does not promise a profit.

Then pick a review date, such as every three or six months. Useful reasons to act include a change in your goal, a big fee change or real news about the business. A price alert every hour is not one of them.

Practising with virtual money first can help you learn the buttons and explain your choices. But results with pretend money do not prove you are ready, and they cannot predict real returns.

Keep learning with how to diversify and buy and hold investing. When you compare brokers, start with our stock trading apps for beginners.