The evolution of online brokerage has opened up the world of stock trading more than ever to the public. Features such as commission-free trading, $0 minimums to open a brokerage account and fractional share trading have lowered the barriers to entry for small individual investors. Meanwhile, unprecedented gains in the market have spurred tremendous interest in trading stocks. In this article, we’ll cover how to get started in trading stocks, from opening an online brokerage account to picking stocks to invest in and placing orders
What are Stocks?
Stocks are securities that represent an ownership share in a company, which can be bought or sold. When buying stock, individuals are buying a tiny fraction of the company itself, called a share. Stocks are used as investments, as investors hope that their price will go up over time and that they can later be sold for a profit. Owning stock also grants the right to vote in shareholder meetings and to receive dividends. Dividends are regular distributions of profits to eligible shareholders, but not all stocks pay dividends. Publicly traded companies offer their stock through exchanges, such as the New York Stock Exchange or Nasdaq. Historically, stocks have outperformed other investments such as bonds over time.
How and Where to Invest in Stocks?
There are various ways to invest in the stock market, certain methods are well suited to beginner investors whereas experienced traders may opt to use platforms that provide a greater degree of autonomy.
Work through the checklist below to identify the best option for you.
Getting Started: Checklist
- Decide how you want to invest
- Determine what to invest in
- Choose your investing strategy
- Assess how much you can invest
How To Invest: Self-Directed vs. Managed
You don’t need to be an ‘expert’ to invest in the stock market, if you are keen to start investing but don’t yet feel confident about how and where to invest, you may prefer to seek some expert help.
If you already have a sufficient level of investing knowledge, you may opt to independently choose stocks and funds.
Explore the options below and assess which would best suit you.
- Self-Managed: This option is well suited to those with greater knowledge on investing and have the confidence to make independent investing decisions. These individuals also need to ensure that they can devote sufficient time to their investments, researching new opportunities and overseeing their portfolio.
- Robo-Advisors: These automated investing services use algorithms and software to build, monitor, and automatically rebalance a diversified portfolio based on your financial goals. Robo-advisors have low minimum investment requirements and are less expensive than using a human advisor. Fees for a robo-advisor typically range from 0.25% to 0.50% of the assets under management (AUM) annually.
- Financial Advisor: If you are looking for expert help, a qualified financial advisor will be able to consider your investment objectives and budget and will be able to provide recommendations. Overall, this approach is more ‘hands-off’ as the financial advisor can also execute the trades on your behalf. However, this option comes with higher fees.
Types of Investment
Investors can participate in the stock market in several ways. Among these, they can choose to invest in individual stocks or index funds.
- Individual stocks: Many investors choose to invest by picking individual stocks and creating their own unique portfolio. By trading individual stocks you can make use of your knowledge and expertise. You may be able to ‘beat the market’ (generate a better return than the market average), but it is statistically unlikely over time.
- Index Funds: An index fund is a type of mutual fund or exchange-traded fund (ETF) which tracks the components of a financial market index, such as the S&P 500 Index or Nasdaq 100 Index. There are several major benefits of investing in index funds. They have historically outperformed other types of funds that are actively managed by leading investment firms. The majority of professional money managers fail to produce returns equivalent to benchmark indices over a multi-year period. In addition, the fees associated with index funds are low, they provide diversification and are tax-efficient compared with other funds.
Choosing a Trading Strategy
When getting started with trading stocks you can also consider the timeframes that you want to work with, which could range from seconds or minutes to months or years. Different styles of trading in relation to time are broken down as follows:
- Day trading: using this approach, traders are usually in and out of the markets multiple times during the day in an effort to capture small or large intraday moves.
- Swing trading: this involves holding a position in the market ranging from a few days to several weeks or months.
- Long-term investing: typically long-term investments refer to positions in the market held for at least a year or multiple years.
Legendary investor Warren Buffett made his preference for long-term investing clear with the famous quote: “Our favorite holding period is forever.”
How Much Money Do You Need to Invest?
How can beginners invest in stocks with little money? In today’s financial world, new investors require very little to get started. Many leading US stock brokers now have $0 minimums to open an account. Using fractional share trading, with only $100 you could buy a fraction of a share of Tesla stock, for example, since a single share costs a lot more than $100. This makes it possible to dip your toes in the market and invest in even high-flying stocks with little money.
The table below illustrates the trend towards $0 opening balances, commission-free trading, and the availability of fractional share trading among leading US brokers.
|Broker||Minimum Balance||Commission-Free Trades||Fractional Share Trading|
Fractional shares cannot be bought directly but dividend reinvestment in fractional shares is allowed at these brokers.
Another question that people often ask is how much of their earnings they should set aside for investment. Experts generally recommend allocating up to 20% of your after-tax income for financial investments such as stocks or bonds. Nevertheless, you should keep in mind that it’s best not to invest money that you may need in the next 5 years.
How To Buy Stocks With A Broker
Opening an account with a broker is a simple process that can usually be done online in less than half an hour. As part of the application, you will typically be asked the following:
- Your citizenship
- National ID number
- Phone number
- Employment information
- Annual income
- Net worth
- Source of funds
- Whether you or any member of your immediate family is associated with a broker-dealer firm, a financial services regulator, a securities exchange, or a member of a securities exchange
- Whether you or any member of your immediate family is a member of the board of directors, a 10% shareholder, or a policy-making officer of a publicly-traded company
When choosing an online broker some important points to consider are the following:
- Fees: this could include commissions for trading or account-related fees such as an inactivity fee.
- Trading platform: this is the software through which you place your trades and can access charting and other trading-related tools.
- Research and educational materials: the resources offered by the broker to help investors improve their performance.
- Customer service: factors to look at include the available mediums of customer service such as live chat, phone support and email, their responsiveness, and the hours of availability.
Most brokers offer a free demo account, which is a great way to practice placing trades in live market conditions and to become familiar with their platform, without risking any real money.
Choose Your Stock Order Type
If you are an investor in individual stocks you will need to become familiar with the mechanics of buying and selling from the platform of your broker. When it comes to placing stock trades with your broker you will typically have a range of key order types to choose from:
- Market Order: This is an order to immediately buy or sell a set number of shares. When using a market order your order will be executed right away, but there is no guarantee of the price you will receive. Unless the market is moving quickly you will usually receive the current best bid (buy price) for a sell order, or the current best offer (sell price) for a buy order.
- Limit Order: This order type specifies that a buy or sell order must be executed at a set price or better. Imagine for example that you bought shares of Tesla (TSLA) at $400 a share and you have a goal to sell those shares at $1,000. If you place a sell limit order at $1,000, your order will only be executed if Tesla stock reaches that level.
- Stop Loss Order: This order type is commonly used as a means of limiting losses in the market. Let’s imagine you bought Apple (AAPL) at $160 a share and you only want to risk the stock falling by $10. In this scenario, you could enter a sell stop order at $150. If Apple falls $10 and reaches this price, the sell stop loss would be triggered and executed at the best available price.
How to Buy Stocks Without a Broker
It is also possible to buy stocks without a broker, using a company’s direct stock plan (DSP). Investors can buy stock by simply making a payment from their bank account to the company. Investors using DSPs have some benefits such as receiving news directly from the company, rather than through a broker. Until recently DSPs had the benefit of saving money on commissions, but commission-free stock trading is now the norm at most brokerage firms.
How to Know What Stocks to Buy?
For guidance in which stocks to buy and when, two major forms of market analysis are used: technical and fundamental.
Technical Analysis: This form of analysis typically involves identifying trading opportunities by looking at price movements on a chart. For example, a famous chart pattern is the ‘Head and Shoulders’ which suggests that the price of an asset may drop when certain conditions are met. Volume is another factor used in technical analysis.
Fundamental Analysis: In the context of stocks, fundamental analysis examines important data such as a company’s revenues, earnings, and profit margins to determine its value as an investment.
The first question many investors will ask is, ‘how do you make money from stocks?’. The plan with the highest probability of success is buying and holding a diversified portfolio of stocks or index funds.
How To Find Stocks to Invest In?
Many investors use stock screeners to identify new investment opportunities. Stock screener filters can be used to identify stocks that match the chosen criteria.
The Investing Pro+ stock screener includes pre-made investing strategies, helping investors to identify relevant stocks to invest in.
The video below explains how to use the Investing Pro+ stock screener.
Trade With A Regulated Broker
Regulated brokers are required to follow strict guidelines and are subject to regular audits and inspections to ensure they are operating in compliance with regulations. This provides an added level of protection for traders and their investments.