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How to Invest in Stocks, Bonds & Funds

written by: Brian Nelson•edited by: Jason C. Chavis•updated: 5/26/2011

Investing is an important part of long-term financial planning. Understanding how to invest in stocks, bonds, and funds can be easy if you start with the proper basics.

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    How-To Invest First Step

    Investing in stocks is one of those things that sounds much more complicated than it is, especially if you have never done it before. Fortunately, the most complicated part of how to invest in stocks, bonds & funds is opening the right account. Once you have that step behind you, the rest is relatively easy.

    While there are several alternative programs and account types such as Sharebuilder and investing with DRIPs, the easiest way to invest in stocks without the kinds of limitations that might trip up many investors later is with a brokerage account. There are literally thousands of financial companies that offer brokerage accounts, ranging from well-known Wall Street giants like Merrill Lynch and Goldman Sachs, to little-known regional firms that generally service only a specific geographic area, and everything in between.

    Transferring stocks, money, and assets to a different brokerage account is usually pretty easy, so don't be too concerned if you get the perfect brokerage account on the first try. In fact, many investors have multiple accounts with multiple brokers. Start with a discount brokerage account to minimize your expenses as a beginning investor. If you need advice about which stocks to invest in, you may need to look at other options, but even discount brokerages like Charles Schwab and Fidelity will provide investment advice to their customers.

    Opening a brokerage account is easy. Just fill out the required forms. You can even fill the account opening forms out online for many brokerages, although you may have to return a paper signature form later. Don't forget that The Patriot Act requires financial firms to verify your identity, so don't get cute and use a fake name or address.

    Once your account is open, you need to put some money in it to invest with. This process is known as funding your account and can be done in numerous ways. You can mail in a check with your application or transfer money from your bank account. The only thing you can't do is show up with cash. Anti-money laundering rules and regulations prohibit brokers from accepting cash in most cases.

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    How To Invest In Stocks

    how-to-buy-stocks-fidelity Investing in stocks is the action around which most brokerage accounts revolve. You'll find stock charts, stock screeners, stock trading tools, and stock research front and center with most online accounts. Login to your account and look around. When you are ready to invest in stocks, a clearly marked button will say something like Buy Stock or just buy.

    Click that button an you are on your way. For any stock trade order, you'll need the name of the stock you want to buy, or its ticker symbol, and the number of shares you wish to purchase. The simplest stock order is a market order which simply executes your buy order instantly at whatever the market price is at that moment. Other stock order types such as stop-loss orders allow you more control over the price you pay, at the cost of less control over when your order is executed (if ever).

    Image: Screenshot of Fidelity brokerage account platform.

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    How To Invest In Bonds

    Investing in bonds is a little more complicated, until you fully grasp bond market basics. This is because the bond market is not as large or as liquid as the stock market. There are a limited number of bonds in any issue and in order to buy them, there must be a seller of the same bond. To facilitate this type of bond investing, major financial firms have bond desks which both carry an inventory of bonds that they buy and sell. They also maintain contacts with other bond desks in order to find bonds for sale that clients may wish to purchase.

    To invest in bonds directly, you will need to buy via bond desk, either directly or indirectly.The exception is investing in US Savings Bonds and U.S. Treasuries which can be bought directly online from the US Treasury Department's Treasury Direct website.

    Some online brokerage accounts will display an offering of bonds available for purchase. To buy these bonds, simply select the bond desired and click on the buy button. Unlike stock investing, there are no special types of orders because bond prices do not move as quickly as stock prices, so the price when you enter your trade, is the price you will get when your trade is executed.

    If you wish to purchase bonds that are not listed in your platforms inventory, you can either request a quote online or speak directly with a broker who can get a quote for you from the bond desk.

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    How To Invest in Funds

    Mutual funds make investing easier for many investors. Rather than purchasing individual stocks or individual bonds, your dollars are pooled with other investors and invested by the fund manager.

    Many mutual funds can also be purchased through your brokerage account. Indeed, this is often preferable for larger and advanced investors in order to manage all of their fund investments from the same account. However, investors may purchase shared in mutual funds directly from the mutual fund company in many cases. To do so, you will need a separate account with each mutual fund company whose funds you buy.

    Unlike bonds or stocks, no quotes are necessary to invest in funds. Rather all investors in a mutual fund on a specific day get the same price. The price is calculated based upon the invested dollars and how each investment changed on that day. This is known as pricing the fund and is done via accounting mechanisms after the market closes.

    To invest in funds, simply enter a buy order. No order type or price is required. However, unlike stocks and bonds, you may request to buy a specific dollar amount of a mutual fund rather than a specific number of shares. This is because funds are accounted for in fractions of a share on a routine basis.

    Of course, there are numerous market strategies and stock picking techniques out there to help you choose which specific securities to buy. However, the basics of investing in stocks, bonds, and funds are simple once you have the investment account ready.