Buying shares is not that complicated. If you want to start making money in the stock market, you can do this within a few days. Before you buy shares, you should learn some basics of trading. In this article, I go over how you can get started quickly as a beginner.
Get a broker that acts as a middleman
A broker nowadays acts as a middleman who buys, sells, and holds shares for you. They are usually firms that you create an account with funded by your money. You will get access to their trading tools where you can look at charts and plan your trades.
How the buying process works
Let’s have a closer look at how the entire process works from issuing an order until you own shares.
1. Issue an order
With the platform the broker provides you, you initiate a buy order for a particular stock. With that order, you provide information about the number of shares you want to buy. Different types of orders specify how the broker should purchase the shares. The commonly used types are listed below:
- Market Order – A market order is an order that you want to get executed immediately without a limit price. You will get your shares at the current price if there are sellers there. If there are not enough shares for sale for your order, they will fill you at the next higher ask prices. That means that you can get a higher than the anticipated average price for your shares (this is also called ‘slippage’ in trading). Market orders are great for getting in a trade quickly but bad if you want to get a reasonable average price for your shares.
- Limit Order – A limit order is an order to buy or sell shares with a limit price. It gets executed like a market order until the price reaches a particular limit price that you define. This type of order allows you to have more control over your desired price. A lot of traders use a limit order to delay the order execution until the stock price reaches the limit price.
2. Order gets forwarded to the marketplace
Trade execution is not instantaneous. The trade is sent to the broker over the internet. They then need to decide to which market they are going to send the order to. There are different routes/market makers the broker chooses that can be slow or fast in execution. Some brokers let you choose these routes yourself, but most of the time you are fine with the broker doing this automatically. If you have a good broker, this whole process usually takes less than half a second until your order reached the market.
3. Market maker tries to match orders
Once the order has reached the market, it is the market maker’s responsibility to match orders, meaning to bring buyers and sellers together. Once the market maker found a match, the money will flow from the buyer to the seller in exchange for shares. All this is done electronically and extremely fast (milliseconds). There are still human market makers that basically can influence this automated process and steer the price to some extent to fill orders.
4. Share ownership goes back to your broker
While the money to buy the shares gets deducted from your account and sent to the seller’s account, the ownership of the shares, you just bought gets assigned to your account (virtually).
CFD (Contract for Difference) trading provides an exception to the process I just described. With CFD’s, you are not directly participating in the market, meaning your order is not sent to any particular marketplace. You agree to exchange the difference in the price of an asset. Because you are not directly participating in the markets, your order will get filled instantly without any delay. To learn a bit more about CFD’s check out my review of Tradenet, which is an educational service that offers CFD trading for beginners.
What brokers should you use?
There are various brokers to choose from. For beginners, it is usually very advisable that the broker comes along with some education. We compared the best brokers for beginners here.
Do not buy shares without learning how to trade
Newer traders or investors tend to buy shares of a stock blindly expecting the price to rise. Beginners are usually driven by greed and hope. And even when they are losing money, they double an triple down on their position, ending up losing all their money like 90% of retail traders.
If you want to avoid having the same fate, you have to start to learn how to trade. Proper risk management is essential for your success, and you should start small before you go all-in with your money. We put out a free trading guide for beginners that will teach you all you need to know to get started.