How to Buy Public Stock

Buying stocks involves a series of decisions.

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The process of buying and selling publicly traded stocks on the New York Stock Exchange and other public stock exchanges such as the Nasdaq is straightforward. Most investors buy and sell stock through stockbrokers who execute stock trades as directed by the investor and maintain account records for the investor. For their services, brokers collect a commission from the investor. To buy stocks, an investor must make a series of decisions.

Step 1

Decide whether you want to use an online electronic brokerage or a traditional stockbroker. Online brokerages generally charge lower commissions on stock trades because of lower operating costs, but they don’t offer extensive research and advice services. A traditional broker offers a broad range of personal research services and advice on picking stocks, but she generally charges a higher commission on stock trades.

Step 2

Once you have selected a stockbroker, decide how much you want to invest. Open an account by depositing your investment funds with the brokerage. The brokerage will withdraw funds from your account to buy stocks for you and will deposit the proceeds from stock sales into your account.

Step 3

Decide what stocks you want to buy and how many shares you want to purchase. A commonly used tool for evaluating stocks is the price/earnings ratio. This ratio is figured by dividing the price per share by the earnings per share. P/E ratios for most stocks are readily available. A stock with a P/E ratio that’s below the market average can be a better value than a stock with a P/E ratio above the market average. Historically, most stock P/E ratios have been in the mid-teens.

Step 4

Decide whether you want to place a “market order” or a “limit order” with your broker for the stock you want to buy. A market order directs your broker to buy the stock at the prevailing market price. A limit order directs the broker to buy the stock when the market price reaches a specific price per share. You can place market orders or limit orders when you sell stocks, too.