How to buy stock

1. Open a brokerage account

With a brokerage account, you can purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds and other investments. Opening a stock brokerage account is fairly straightforward, but the process varies depending on how you open one.

No matter which type of brokerage account you decide to open, you’ll need to provide certain information as required by law. Additionally, the brokerage company may have its own questions to help identify which products, services and pricing plans are best suited to you. Expect to include your:

• Full legal name
• Home address
• Social Security number
• Birth date
• Contact information
• Funding information (i.e., bank routing and account numbers)

Some brokerages may also ask questions about your risk tolerance, tax profile, beneficiaries, investment objectives and accreditation status.

With brokerage accounts requiring so much personal data, information security is critical. Richard Gardner, CEO of Modulus Global, a financial technology company, warned: "The most important factor when choosing a brokerage account is the security it provides. This includes their cybersecurity practices, in addition to their accreditations."

» MORE: Best online stockbrokers for beginners

2. Choose your stocks

Deciding which stocks to buy can require a lot of research — it's the part of the stock-buying process that should take the most time. One famous rule for growing wealth, according to  Warren Buffett, a renowned business investor, is to never invest in something you don't understand, and that applies to individual stocks as well as other investment types.

Before you buy a stock, it's essential to know about the company. Research the leadership and structure of the business. Review its history and check out how stock prices have risen and fallen in the past. Look at the company's balance sheets to see if it's a stable organization.

You must find stocks with strong earnings over time, a decent return on equity and stable yet growing profit margins.

Here's how a potential investor may evaluate those benchmarks:

• What are the earnings per share (EPS) growth patterns? The EPS shows how much a company is profiting for every share of stock, which indicates its profitability. If a company has an EPS rate of $10 in 2019 and an EPS of $12 in 2020, its growth rate is 20%. This suggests that the company's profitability is growing. A company that grows over multiple years has a return on equity (ROE) with an upward trajectory.
• What is the company's return on equity (ROE)? Return on equity is the net income of a company divided by shareholder equity (assets minus debt). The company's ROE shows how effectively it turns its assets into profits. If a company had a net income of $10 million last year, assets of $50 million and debt totaling $20 million, it has an ROE of 33%.
• What is the company's profit margin? Profit margin measures how effective a company is at turning sales into profits. Can the company keep costs low while increasing the potential to profit? With profits of $100,000 and total revenue of $1 million, a company has a 10% profit margin. can occur.

» MORE: How to choose a financial advisor

Consider mutual funds or ETFs

Investing in a mutual fund lets you put money into the stock market, but you purchase a share of a professionally managed stock portfolio instead of individual stocks. This gives you the advantages of a diversified portfolio without having to dig into the research on each stock on your own. Stock mutual funds may come with management fees averaging 0.44% to 0.66%, which could reduce your long-term returns.

Exchange-traded funds (ETFs) offer the diversification of mutual funds, but they trade throughout the day like an individual stock. One of the benefits of ETFs is that they tend to have lower fees, typically between 0.11% and 0.16%. Be sure to research your options carefully and understand the associated costs before investing in any type of mutual fund.

There are numerous mutual funds and ETFs that focus on specific investing niches, like company size, location and industry. Others mirror the performance of indexes, such as the S&P 500 or Wilshire 5000.

Use a robo-advisor

A robo-advisor offers simplified investing through a mobile app or website. Robo-advisors typically offer predefined stock portfolios based on your answers to a short quiz about your investing goals and mindset. You can also manually select which portfolios to invest in if you don't like the app's advice.

Some robo-advisors allow clients to create customized portfolios by selecting individual stocks or certain industries, companies' sizes and locations. This allows for greater customization to align these investments with the rest of your portfolio.

3. Execute an order to buy stock

Each brokerage firm has its own platform, so it's smart to spend some time learning how to find the information you need before you begin purchasing stocks. The best brokerages offer tutorials that serve as a virtual site tour, so take advantage of that information and ensure you fully understand the platform before transferring your money to the brokerage.

When determining how many shares to buy of your selected company, consider these factors:

• How does the stock fit into your overall investment strategy? You should have a well-balanced portfolio, so don’t put all your eggs in one basket. Plus, understand how the stock has performed in the past so you know how historically reliable it is.
• How much money do you have to invest? And how much of that money should go toward buying a single stock? Divide your investment amount by the price of the stock. For example, if you have $1,000 to invest and the share price is $50, you can buy 20 shares of stock, assuming there are no trading fees (and there usually are).

Traditionally, you need to have enough money to buy a whole share of a company. However, many brokerages now offer fractional shares, which allows investors to buy shares based on how much money they have versus how much a share costs. Stash, Webull and Betterment are three examples of companies that allow investors to buy fractional shares of established companies.

4. Monitor your stock’s performance

You can usually monitor your stock's performance online or through mobile apps. Your brokerage probably has a tool that makes it easy to see the current and historical performance of each of your stocks.

Third-party tools like Empower, Quicken and Monarch sync with your investment accounts to track your portfolio for you. They’re especially helpful if you have accounts with multiple providers and you want to see your reporting all in one place. Alternatively, you can create your own tracking form and reports the old-fashioned way in Excel or Google Docs.

Many online brokers provide free stock screening tools to help potential investors understand a company's EPS, ROE and profit margins. Before you purchase an individual stock, add it to a watchlist. With your watchlist, you can see how the stock price changes over time.

Bottom line

Buying stocks is a proven way to build wealth over long periods of time. With a historical return of 10%, stock returns outpace inflation to increase your net worth. You can buy individual shares of stock through a brokerage account, robo-advisor or direct stock purchase plan.

Before buying a stock, research the company with help from free tools offered by your brokerage and determine how it fits into your overall portfolio. Many brokerages waive trading fees on stocks but watch out for hidden fees or fees for certain types of investments. After you've purchased a stock, track its performance to ensure it's growing as expected and meeting your goals.