The stock market can be an intimidating place for those who are just getting started in investing. But buying stock online is actually fairly simple once you understand a few basics about where to buy stocks and how they’re traded. Let’s take a look at what you need to know if you’re just beginning with stock trading and building a portfolio.
Buying stocks online: A step-by-step guide
1. Open a brokerage account
In order to invest online in individual stocks, you’ll need to open a brokerage account at one of several brokers such as Schwab, Robinhood or E*Trade. The process of opening an account is fairly straightforward and shouldn’t take much more than a few minutes. You’ll need to provide basic information about yourself and any other people on the account.
(You can also check out Bankrate’s broker reviews to see more options.)
2. Fund the account
The next step is to actually put money into your account so that you have funds to invest. This can be done by sending a physical check through the mail, but it’s much more convenient to set up an electronic transfer. To transfer funds electronically, you’ll provide the account information and the financial institution where you’d like to transfer money from. Your money should arrive in your account within a few days.
3. Research stocks you’re interested in
Before buying any stock, you’ll want to do some research on the companies you’re considering. Make sure to read the company’s annual report, or 10-K filing with the Securities and Exchange Commission (SEC), as well as the most recent quarterly reports to get a better understanding of the business and how it’s performing.
Before you make a purchase, you should be able to explain how a company makes money, its position relative to competitors, and what you think the next three to five years are likely to look like for the business. Be sure to pay attention to valuation, or what you’re paying compared to what you’re getting as a shareholder.
4. Place a trade order
Once you’ve zeroed in on a stock to buy, you will need to place a trade order. You will likely have a few different options when placing a trade. Here are the two most common types:
- Market order: A market order means your trade will be executed immediately at the best available price. This type of order puts no price parameters around the order, so the price you ultimately pay may be higher or lower than the most recent quote. Market orders are best used for highly liquid companies that trade lots of shares each day because your order is unlikely to move the stock price in one direction or another.
- Limit order: This order type will execute your trade only at a specific share price or better. For example, if you place a limit buy order at $10.00, the trade won’t go through unless someone is willing to sell at $10.00 or lower. This gives you more certainty about the price you’re paying going into the trade, but you’ll run the risk that the price never reaches your limit. Limit orders are good for stocks that don’t trade very many shares and where your order might influence the share price. This would typically occur with small or micro-capitalization stocks. Limit orders are also useful for stocks with wide bid/ask spreads or high volatility.
You will also face choices on how long you want the trade order to be valid for and whether you want the order to be “all or none,” which means the order won’t be filled unless you can purchase all the shares you’ve asked for. Orders are valid for the rest of the trading day or are “good till cancelled,” meaning the order will usually stand open for 60-90 days or until it’s filled.
What do you need to buy stocks online?
Fortunately, not too much. You’ll need a brokerage account with an online broker, which can be opened in just a few minutes with some basic personal information, as well as a way to fund your account. Funds can be deposited by check or through an electronic transfer.
What stocks should and shouldn’t be traded online?
If you understand the business of the company you’re buying, almost no stocks are off-limits for online trading. Make sure to do your research before making the plunge, otherwise you’re just speculating. However, penny stocks, which the SEC defines as stocks that sell for less than $5 per share, should be viewed with caution because they can be particularly volatile and are ripe for manipulation.
How much money do you need to buy stocks online?
Not very much. Most online brokerages don’t have minimum requirements to open an account and through the trading of fractional shares, investors can now buy into their favorite companies for as little as $5. With many of today’s leading companies’ shares selling for hundreds or thousands of dollars, some brokers offer investors the chance to buy a portion of a share for just a few dollars.
Bottom line
Buying stocks online is a fairly simple process once you understand a few key terms and processes. But just because it’s simple doesn’t mean it’s easy. Make sure to carefully research any company before buying (or selling) its stock to better understand the risks that come with investing in individual shares.
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