You’ve done all the work on finding a stock idea, studying a stock, deciding what you like in a company and in a stock. Now you need to know how to buy a stock. Should be easy, right? Well, not so fast.

Buying a stock is not exactly like walking into a pizzeria and buying a slice. You don’t go into a pizzeria and say “I’ll take a cheese slice for no more than $1.50” when the board says it’s $2. The price of that cheese slice is not going to fluctuate right in front of you. You don’t need to worry it will be worth half as much or twice as much in the next few months. Though, depending on the pizzeria, eating that cheese slice can leave you with just as sick or as elated a feeling as buying a stock.

Not an online brokerage or stock market floor. Source: Stefan Sommarsjö on Unsplash

Let’s go over how to buy a stock mechanically, and then touch on everything that comes with it. This covers the decision-making, the timing, and the emotions. Buying a stock is not super complicated, especially after you’ve figured out what you’re looking for in the company and the stock. That doesn’t make it easy to do right.

This will echo some of what we talked about in how to index.

Market order vs. Limit order

We’ve decided which stock we’re going to buy. We have at least a loose idea of what the stock should be worth, our estimate of its intrinsic value. And we are going to buy the stock at a reasonable discount to that intrinsic value, i.e. our margin of safety.

We need to actually enter a price and decide how we’re going to buy a stock. To do this we can use either a limit or a market order*. A limit order says we will only buy at or below the limit price. A market order says we will take whatever price we can get for the number of shares we want to buy.

* There are other special orders you can use (all or none, fill or kill, etc.). I almost never use these and don’t think they’re very relevant.

Benefits vs. Costs

I almost always use limit orders, because:

• I usually put in an order below the current price of a stock. My thinking is that if I can buy the stock when it dips, that’s better.
• A limit order allows you to plan on how much cash is going to go out your portfolio. A market order entered when the market is closed leaves you at risk of buying a sudden jump or drop in price. With a limit order, you will invest, say, $5,000 or less (if the price drops below your limit price).
• You can set and forget a limit order. I will review stocks and plan out buys (or sells) for the month, say, and set them to be GTC (good till canceled). My brokerage will require me to actually set a cancellation date within the next six months, but this still lets me plan out investments without getting caught up in the daily emotions of market swings.

The main drawback to a limit order is that it depends on a price, and if that price doesn’t hit, you might not get the stock. I have had my eyes on Duolingo since it came public in the summer of 2021. In Q4 2022, its shares got close to where I wanted to buy. I set a limit price for $60. It never got below $64, I missed out, and now the shares are above $165.

That’s not a perfect example – my mistake was more in how convinced I was I should buy shares. I have had cases where I missed a fill of my order by less than a dollar. I then miss out on the opportunity. That’s the risk with limit orders.

Which type of order is right?

As I tend to worry more about overpaying than missing out, I feel better with limit orders. If you feel the reverse, maybe use market orders.

Market orders are also best used if you enter them during the trading day – where the price is less likely to jump on you. And if you use them on highly liquid stocks – i.e. popular stocks where a lot of shares are traded – you are unlikely to get a strange price. This is why I suggested market orders make more sense for indexing.

Ultimately, this choice is not going to make the fundamental difference in your investing. Your analysis leads you to decide whether to buy, and matters more than whether you pay $8 or $8.23/share. If you’re right that the company is worth $12, you will win either way. But on the margins, limit orders or market orders can make a difference.

Deciding when to buy

The ‘I feel worse about overpaying than missing out’ or vice versa spectrum is important. Because even more than limit order vs. market order, your decision about whether, and at what price, you want to own a stock is what matters.

I like to have 50% upside in a new stock I’m going to buy, as a loose rule. An example: I bought some shares of Levi Strauss at about $13/share. I think shares could be worth over $26 in a few years, in a conservative scenario. If I factor in the value of time over money, I shares could be worth almost $20 now. I’m not 100% confident I understand the stock, though. The end result: I started a small position, and then sold my shares after mediocre news.

A way to think about deciding whether to buy is the phrase, “there’s a right price for every asset”. Every stock can, in theory, work out well if you pay an attractive price. At the same time, the quality of a company is an important predictor in whether you can hold its stock for the long term. That, for me, is an easier way to achieve my goal of growing my money.

In your analysis, you might start with finding the companies you want to buy, and deciding what their stocks should be worth. From there, you can discount to where you get your necessary upside – 50%, or whatever you look for.  Then you can make limit orders for those stocks, and wait until you get the sales you want.

Putting Margin of Safety into Practice

I try to build in conservative expectations on the company’s performance. Then I demand high returns, e.g. the 50% upside goal. This is how I build in a margin of safety, in my view. If I’m wrong but appropriately conservative about my expectations or when I buy, I hope to not lose too much money for my mistake. And if I am right or even pleasantly surprised, things should work out well.

How many shares to buy

No matter how good you feel about the price you are buying shares, the market could make you feel silly tomorrow. What was worth $8 today might be $7 by next Wednesday. That’s a 12.5% drop! Ouch.

I manage this by doing a couple things. First, and again most important, is I make sure my buy prices offer me a sufficient margin of safety and upside. If shares end up at $12 in two years, I won’t care as much that they dropped to $7 or even $6 after I bought. You can’t be perfect in the market; being good enough at hitting those 50% calls will go a long way.

Averaging up vs. Averaging Down

I also tend to not buy a full position all at once. Let’s use some illustrative math. Say I want to own 10 stocks in my portfolio. Equally distributed and holding no cash, each stock would comprise 10% of my total portfolio at the initial buy price. I will put in an order for a half position, or 5% of my portfolio. If that fills and I ‘bottom-tick’ the stock, meaning I buy it at its lowest point, great. 5% is not a trivial amount of my portfolio, and will still have a real impact on my results if it goes much higher.

If it goes lower, I might put in another order for 2.5% of my portfolio at a price 5 or 10% below the original price, depending on how risky I think this stock is. And if that fills, I might put in one more order at 2.5% of my portfolio at a price 5 to 10% below the second buy price.

In the cases where I get all three orders in, and they’re all averaging down, I’m at a full position at a good discount to my original buy price – that I was happy about – or owning more shares than I would have otherwise. And in a case where my stock goes up from the first buy, I can hardly complain either.

The biggest risk to averaging down is that the stock stays down or goes lower. But that’s a bigger risk if you buy a full position at the first price. The hope is that we’re focused on companies that control their destiny (and have good balance sheets/cash flow), so that the stock price doesn’t matter to their operations.

Controlling your emotions

Eating that slice of greasy cheese pizza can make you feel a number of things. Joy and pleasure up front. Satisfaction after you eat. And then regret and agony at the health costs, or the aftereffects, or that you could have bought a pepperoni slice instead.

This is where buying a stock is similar, but worse. Every day, the market is going to tell me whether it thinks I made the right or wrong decision. Imagine a global chorus asking you why you ordered that pizza and weighing in on your eating habits five times a week. That’s the market.

Understanding and preparing for these emotions is vital to having a successful career as an investor. Every time I buy a stock, I’m excited to have added it to my portfolio. And at the same time, I feel the dread of ‘what have I done? What does the person selling the stock know that I don’t?’

Handling Excitement

I want to manage the excitement so that I don’t buy too much all at once, in case I’m wrong. This is where averaging down, or averaging over time, at least, helps me. Setting some sort of limit of how much money I’ll put into a stock also helps.

We only need 6-8 stocks to have good diversification in our portfolio. But if one stock is worth 75% of your portfolio, the other 5-7 stocks don’t matter. You’ll find what rule works for you, but having an upper bound for how much you’ll buy initially is helpful.

Managing Dread

I find the best way to deal with dread is a combination of avoidance and humility. The less you look at stock prices, the better for your mental health. (Again, this is why limit orders are valuable, since you can set ‘em and forget ‘em).

My favorite Warren Buffett saying is that we should buy a stock as if the market will be closed for ten years, without a chance to trade in or out of the stock. That forces us to own companies that will last that long as reasonable investments.

But more importantly, I think, it allows us to remember that tomorrow’s price is not what matters. Only two stock prices matter to an investor: the price you pay to buy, and the price you receive to sell. The journey in between is less important.

At the same time, if you can maintain calm about changing prices, it’s worth taking in new information with humility. We will never know everything about a stock, and new events will happen that will change prices. Those new events can be inputs in understanding what the value of the stock should be.

And in the cases where we get that value wrong, those are learning opportunities. We’ll talk more about getting it wrong, but a common concept on the market is that your lessons aren’t free, the tuition is just paid out of your portfolio.

Never gets old

Buying a stock is a necessary though not sufficient step to investing successfully in stocks. The mechanics will become old hat after you do this a few times. You’ll figure out what proportion you like to buy to open a position, what your averaging down (or up) strategies are, and what margin of safety means for you.

For the thousands of times I’ve now done this, though, the emotional aspect never goes away. I feel a pit thinking about my latest buys, and I feel an emptiness thinking about the stocks I missed out on. That’s part of life as an investor, and I’d argue it’s among the most important parts of investing to understand and manage.

You can’t shut off your emotions. But part of buying a stock well is setting up the rules and guidelines for yourself so that your emotions don’t push you into bad decisions.

“It’s said that a wise person learns from his mistakes. A wiser one learns from others’ mistakes. But the wisest person of all learns from others’s successes.”

That bon mot applies to the market as well. I’m going to round out the course with examples from my investing – both successes and mistakes – as well as examples from famous investors. You’ll still need to learn for yourself what works best and doesn’t, but hopefully these examples will give you some ideas of what could go right, and what could go wrong. Stay tuned for those.

Disclosure: I have no positions in stocks mentioned in this post. That may change at any time.