How to Buy Stocks Online
For many people, the idea of investing and trading in the stock market is intimidating and overwhelming, preventing them from taking the very first step. Fortunately, getting started in the market and learning how to buy stocks online is not as difficult as it may seem, thanks to the variety of online brokers and trading tools that are available.
In this article, we will lay out a simple step-by-step process of buying stocks online that will kick-start your journey into the financial markets. However, before taking that leap, we strongly advocate that you get a feel for investing by paper trading. This is the practice of tracking trades without using real money. A simple way to accomplish this is to set up a hypothetical portfolio on Yahoo! Finance and to update it as trades are made.
After a few weeks, an understanding of your trading style and risk tolerance will emerge, putting you in a better position to dip your toes into the stock market and buying stocks online.
Finding and Selecting an Online Broker
Deciding which online broker is the best fit for your investing needs, style, and experience is the first task. Over the years, consolidation has dwindled the number of online brokers in the industry, yet there are still plenty of options for buying stocks online from which to choose.
The list includes Charles Schwab, E*Trade (now owned by Morgan Stanley), TD Ameritrade (now owned by Charles Schwab), Fidelity, Interactive Brokers, and Robinhood to name several. Briefing.com has a business relationship with each of these brokers, except Robinhood.
These firms may have different trading fees, charting tools, mobile app capabilities, research platforms, and educational resources, among other items. Determining which firm is best will ultimately boil down to an individual’s specific needs, budget, and comfort with the brokerage’s platform.
The scope of this article is not to “get into the weeds” and to evaluate every feature for every online broker, but we believe we can steer readers in the right direction.
Robinhood is a relatively new online brokerage service offering commission-free trading of stocks online and no fees when buying cryptocurrencies. It has become a very popular service for younger investors who are looking to buy stocks online.
Interactive Brokers tends to cater more to advanced traders who may be interested in trading options, futures, commodities, or currency products.
For our purposes, we will focus on capabilities revolving around online stock trading.
Charles Schwab, Fidelity, E*Trade, and TD Ameritrade are excellent sources for trading stocks online, offering a host of services that cater to the needs of all users, ranging from beginners to investment professionals.
Qualities one may want to prioritize in searching for an online broker include ease-of-use, stock screening and analysis tools, educational resources, and fees/required balances.
Applying and Funding Your Online Brokerage Account
Thanks to those $0 account minimums, it is possible to give each platform a test run before making a final decision. To do so, a fairly painless application process will ensue when opening an account. You can expect a few financial-related questions (net worth, annual income, etc.), in addition to inquiries about your trading style, the number of trades you expect to make per week or month, and what assets you plan to trade.
Once the application process is completed and approved, the next step is to fund your account to start trading stocks online. Mailing in a check with your account number written on it is an option, but we strongly suggest setting up electronic deposit and withdrawal capabilities. This route is much quicker, giving you access to your funds typically within a day or two, while eliminating the risk of losing a check in the mail.
To set this up, information such as bank account and routing numbers (can be found on a check), in addition to the username and password for your banking website, will likely be needed. If any troubles arise, a quick phone call to the online broker's customer service desk should be able to guide you through the process.
Trading Time
Now that an online broker has been chosen and the account is funded, it is time to take the plunge and make that first trade. Leaning on an understanding of your investing style (growth, value, income, etc.), and taking advantage of the stock analysis tools available at your brokerage, the perfect stock is lined up to be purchased.
Accordingly, a new set of decisions will arise. Specifically, how many shares are you looking to buy, what is the maximum price you are willing to pay, what type of order are you using to buy stocks online, and how much are you risking?
The first question relates to your personal risk tolerance, but we believe it is sensible to limit the risk per trade by starting out with smaller orders.
The maximum price you are willing to pay and the type of order you use go hand-in-hand. For a highly liquid stock — i.e., one that trades with a lot of volume — a simple market order is probably sufficient. This means that the market maker will buy or sell the stock at the best available price and that the order will usually be executed immediately. For smaller stocks that are more thinly traded, a limit order may be preferable because it allows you to specify the highest price you are willing to pay for a stock. In other words, you are communicating to the market maker not to execute the trade unless the stock can be bought below a certain price. The downside of this approach is that your trade may not be executed, even if the stock is just $0.01 above your limit price.
Finally, determining how much you are willing to risk is always recommended. As an example, if a $20 stock is purchased online, a trader may risk $4 to the downside, meaning that a sell will be triggered at $16. Through use of a stop-loss order, this transaction would be executed automatically, even if the trader is not logged into the brokerage account.
Conclusion
While this article is far from all-encompassing in terms of starting out in trading and investing, we hope that it sheds light on how easy it is to get up and running and buy your first stock online. One of the best aspects of online trading is that there are no minimum balances required at most brokerages, allowing traders to ease into the markets. After some initial legwork, we believe you will find that the effort was worthwhile.
