You have only two ways to purchase stocks: through a stockbroker or by direct purchase from a company. Purchasing stocks through a broker is by far the more common way. Even when you buy stocks online, you still go through a broker or brokerage, even if the whole transaction is conducted electronically. In this article, I walk you through the basic steps involved in starting out and going forward with your stock purchasing plan. I also offer advice on the mundane but critical process of keeping records of your transactions. Setting up and maintaining accurate records of every stock transaction is vital. Doing the record-keeping right from the beginning can spare you a lot of headaches in the years ahead.

Buying Stocks with a Broker

The basic process of buying stocks through a broker is fairly simple:

1. Select a broker and set up an account. I give you some tips on choosing a broker and setting up an account in the next two sections.

2. Place an order with the broker. You place an order simply by calling the brokerage, telling the broker the stock you’d like, and supplying your account number. You also need to explain the circumstances under which you’d like the brokerage to purchase the stock, which I cover in “Understanding different types of orders.” In some cases, you receive immediate confirmation of your order placement, along with a recital of the charges involved. In other cases, executing your order may take a while, and your broker will call you back to tell you when the purchase was completed and at what price.

3. Pay for the purchase. How much you owe right away depends on whether you set up your account as a cash account or a margin account. I explain the difference between the two in “Picking an account type,” later in this section. If you’re selling a stock, the process is much the same. Call the broker, tell her what you’d like to sell, arrange to get the stock certificates to the brokerage (if the brokerage isn’t holding them for you), and tell the order taker how you’d like to receive the money either in a check in the mail, as a credit to your account, or as a credit toward another transaction.

Choosing a broker

What should you look for in a broker? Brokers come in two types:

- Full-service brokers. Full-service brokers provide advice as part of their fees, and they generally have local offices. Ideally, you work with one associate in the office, someone who tries to get to know you and your financial goals. Some of the more prominent full-service firms in the United States include Merrill Lynch, Morgan Stanley Dean Witter, PaineWebber, Prudential, and Salomon Smith Barney. But this is far from an exhaustive list. Look in your phone directory under “stocks” for more brokerages.

- Discount brokers. Discount brokers essentially do nothing but take orders, so you won’t have a company representative to work with consistently; you get whoever answers your toll-free telephone call. The good news is that discount brokerages have less overhead and pass the savings on to you in the form of lower fees. The bad news is that you should not expect discount brokers to assure you that you’re making a good or bad purchase. Some of the more prominent discount firms in the United States are Schwab; Donaldson, Lufkin & Jenrette; Fidelity; Waterhouse Securities; and Quick & Reilly. All stockbrokers charge a fee, or a commission, for their services. These fees vary greatly. As part of your stock-buying research, you need to ask several brokers for information about their fees; also, inquire about what you can expect to pay when you sell the shares at some future date. Brokers are more likely to give you a straight answer about their fees if you present them with a specific request say, for example, the charge for purchasing 100 shares of XYZ Corporation. Fees are higher on odd lots (any order of 99 shares or fewer) than they are for round lots (a purchase of 100 shares). Because you may not be able to afford a round lot, you can consider the odd lot option even if it carries a higher fee.

After you survey brokers about their fees, select one broker to process your purchase. You must first set up an account with your broker, even if you’re using an online broker. Setting up an account is a somewhat complicated process, but you have to go through it to become a stock investor.