How To Buy Stocks: Complete Field Guide for Investors
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The year is 2020 and it has never been easier to get into the stock market.
The prevalence of the internet has made it possible to trade any time of the day no matter where in the world you are. Most of the time, if you want to buy stocks, you have to go through a stockbroker.
However, it is perfectly possible to get into stock trading on your own without a stockbroker. Today we are going to show you where to buy stocks and how to do it, covering online brokerage firms, what stockbrokers do, and how you can buy and sell stock with or without a stockbroker.
What Is a Brokerage Account?
If you have spent any time looking at stocks or talking to your friends who dabble in stocks, you likely have heard of brokerage accounts. A “brokerage account” sounds like one of those financial mumbo-jumbo terms like “amalgamation” or “quantitative easing”, but the concept of brokerage accounts is rather simple.
The following sections will cover what brokerage accounts are, what they do, the types of brokerage accounts, benefits/drawbacks of brokerage accounts, and whether you should open a brokerage account.
Brokerage Accounts Explained
A brokerage account is a specific kind of account that lets you purchase and sell investments. You first deposit an amount of money into your brokerage account and then you can buy and sell securities. Brokerage accounts are usually run by brokerage firms or investment companies.
In a nutshell, brokers hold onto your investments and act as an intermediary between you and the securities you want to buy or sell. The individuals and companies that handle your investments are called stock brokers.
Brokerage accounts give you access to a number of investment types like stocks, bonds, mutual funds, forex trading, cash management and more. The key benefit of brokerage accounts is that you have access to all kinds of investments under the guidance of expert brokers and you have access to an interface that makes trading easier.
Brokerage accounts opened under a brokerage firm usually come with some kind of expert guidance so you can responsibly manage your funds. Many brokerage firms handle all investments with minimal input from the account owner.
How Do Brokerage Accounts Work?
Brokerage accounts are actually pretty simple. First, you fund the brokerage account by depositing funds from your checking or savings account, or another brokerage account.
Once you have the funds, you can invest those funds into various securities. The brokerage firm takes a small commission for every buy/sell order. Most brokerage firms have three kinds of fees:
- Brokerage fee: Most brokerage firms have a monthly fee you must pay to maintain your account. This fee can be a flat rate or a percentage of your account value.
- Transaction fee: Brokerages also charge a fee every time you buy or sell stock. Usually, transaction fees are a flat rate but this can vary depending on the firm.
- Management fee: If your account is directly managed by a stockbroker then you will have to pay a management fee. Management fees are usually a set percentage of the total managed assets.
These fees can vary greatly depending on the amount of the purchase/sale and the specific brokerage firm. For instance, the average transaction fee for a full-service broker is around $150 but some discount firms run as low as $10 per transaction.
The amount of fees you will pay depends on the type of broker you have and how many services they offer.
Types of Investments in Brokerage Accounts
Brokerage accounts can be made up of many different kinds of investments. Here are just a handful of the many kinds of investments that can make up a brokerage account.
Stocks represent partial ownership of a company. You make or lose money on stocks depending on the companies performance. If they do well, the value of your shares rises and if they do poorly the value drops.
There is a distinction between common stocks and preferred stocks. Common stocks give owners shareholder voting rights but they are last in line to company assets. Preferred stocks do not come with shareholder voting rights but they get a larger cut from dividends.
Bonds are loans made to companies, government entities, or other organizations with an agreement to pay back the principal loan with interest after a certain period of time when the bond matures.
With a bond, you are essentially loaning money to an organization with the agreement they will pay you back at a later date plus interest.
Investment funds pool the money of several investors and buy/sell according to a specific strategy. Investment funds are a way for investors to pool their assets to minimize individual risk. Mutual funds, for example, are a kind of “open-ended” company that pools money from investors and raises money by selling its own share.
These are just some of the most common types of investment including options, annuities, and bank products. It is recommended that you take the time to research specific investment types to figure out their risk/reward ratio.
Withdrawing From a Brokerage Account
No matter what you are investing for, the time will likely come when you need to tap into your brokerage account for funds.
Unlike a regular bank account, withdrawing funds from a brokerage account has some extra steps and can be complicated. A regular bank account has a fixed balance and when you withdraw, your balance is reduced by the amount you withdraw.
Since brokerage accounts are mostly made out of stocks and securities that change value over time, you can’t just withdraw a set amount without buying or selling securities. The only time you can straight up withdraw money from your brokerage account is when you have a lump sum of uninvested cash.
In that case, you can normally have your broker send you a physical check for the desired amount or have them initiate a wire transfer to a bank account. Normally, transferring cash from your brokerage account does not net any fees.
The reason why you might not be able to withdraw as much money as you want from your brokerage account is that you have to sell stocks to come up with the necessary cash. If you need to sell stocks to make a withdraw, then you need to follow a 3-step process.
- Find the stocks you want to trade.
- Wait until the trade is finished, which can take up to 2 business days
- Request the withdrawal from your brokerage firm.
Taxes on Brokerage Accounts
Depending on the specific kind of brokerage account you have, you may also have to pay taxes on your capital gains, dividends, interest, or withdrawals. Generally, brokerage accounts for retirements are the only ones that gain some sort of tax advantage.
Many brokerage accounts provide tax advantages when used as specific types of retirement accounts. For instance, many people open retirement accounts to defer taxes on their earnings either entirely or before they withdraw.
With a tax-deferred account, you contribute pre-tax dollars to your brokerage account and then pay an income tax on any amount you withdraw in the future. Regular individual retirement accounts (IRA) and 401(k)s are common kinds of tax-deferred brokerage accounts. These kinds of accounts allow you to avoid paying taxes on your contributions. Instead, you defer those taxes to when you access the money.
You can use a tax-deferred account to save on paying taxes in the long run. For instance, say you are currently in the 32% marginal tax bracket and expect to be in the 24% bracket by the time you retire. It would make more sense to invest your pre-tax income into a 401(k) so you can avoid paying the 32% rate on your contributions now and only pay the 24% rate later when you withdraw.
Roth IRAs are the most common type of tax-free brokerage account. With a Roth IRA, you contribute a portion of your monthly post-tax income.
Since that money has already been taxed, you do not need to pay any more taxes when you access those funds. You could have $10 million in gains on your Roth IRA and still not have to pay a dime in taxes when you withdraw.
Keep in mind that Roth IRAs and other kinds of tax-free brokerage accounts might have income limits. So not everyone will be able to use a Roth IRA to save for retirement.
As a general rule of thumb, it is recommended that young people invest in Roth IRAs and their income will likely grow as they age and they will have to pay more taxes. Roth IRAs also have the added benefit of letting you access your funds for any reason without penalties.
In contrast, older investors ought to invest in traditional IRAs. The reasoning here is that older people are likely paying more taxes now than they will in retirement, so it’s a better idea to invest now and pay taxes when you are in a lower tax bracket. Some people split it up and invest in both tax-deferred and tax-free accounts. There is really no one-size-fits-all option here.
Taxable Brokerage Accounts
Any brokerage account that is not for retirement is a taxable brokerage account. This means that you will have to pay taxes on any gains, dividends or income from interest. The taxes depend on the specific type of income generated from your brokerage account.
The simplest way to make money investing is to buy some security, wait for the value to rise, then sell it for the new amount. The amount by which a stock grows over a period of time is called the capital gain.
Income generated from capital gains is taxed at different rates depending on the amount of the gain and how long you have held the investment. In general, gains on investments you have had for less than a year before selling are called “short-term gains.” Generally, short-term gains incur higher taxes than gains on investments you have held for more than a year.
Here is a simple example: Say you bought a single stock for $20, hold it for 2 years and sell it for $40. The long-term capital gain on that investment was $20. The taxes on long-term capital gains range anywhere between 0%-20% depending on your income bracket, but they are almost always taxed at a lower rate than short-term gains.
Lower taxes on gains from long-term investments are meant as a reward to investors for sticking it out through the long haul and not speculating too much.
In addition to gains, most companies also pay out cash dividends to investors to reward them for being part owners of a successful business. Taxes on dividends are largely determined by what kind of dividend it is.
- Qualified dividends are payouts from companies that are qualified to be taxed as long-term capital gains. Whether or not you receive qualified dividends depends on how long you own the stock, but basically, qualified gains are taxed like long-term capital gains. Again, the purpose of qualified dividends is to reward investors who stick with a company for a long time.
- Unqualified dividends are paid out by companies that do not pay corporate taxes on their profits. Unqualified dividends are usually taxed as ordinary income.
If you earn any interest on a bond or certificate of deposit, that income is taxed as ordinary income. There are 2 key exceptions here:
- If you loan money to the US government by purchasing treasuries, you will pay income taxes on it at the federal rate but it is not subject to state or local taxes.
- Income generated from interest on municipal bonds is normally not taxable at either the federal or state level
Otherwise, any income generated from interest is subject to ordinary income taxes.
When Do I Owe Taxes on My Taxable Brokerage Account?
A common myth about taxable brokerage accounts is that you only have to pay taxes when the money is withdrawn. This is not true. Income earned by a brokerage account is taxable when that income is realized. For taxable brokerage accounts, it does not matter when you withdraw or enjoy that money, only when those gains are realized.
This point is extremely important so we will state it again in bold: Income on taxable brokerage accounts is taxable as soon as that income is realized, not when it is withdrawn.
Many people start investing in taxable brokerage accounts when they have maxed out contributions to their tax-advantaged brokerage accounts. For instance, if you are maxing out your work contributions to your 402(k) and traditional IRA, then you could consider investing in a taxable brokerage account to save and earn even more money.
Types of Brokerage Firms
There are several different types of brokerage firms, differentiated by how they invest and whether they offer financial services to account holders.
The types of brokerage firms range from cheap online brokers that basically act as order takers and expensive full-service brokerage accounts that offer comprehensive financial management and advice.
Online “Discount: Brokers
Online discount brokers are the cheapest kind and essentially just offer a convenient interface for buying and selling investments. Online brokers usually do not interact face-to-face with customers and do not offer in-depth financial advice. You simply sign up for an account, access the online platform, invest funds, and you can buy or sell stocks with just a few clicks.
Since there is not a team of expert financial advisors there to help, if you use a discount broker you are essentially on your own. The only kind of help they offer is technical assistance for navigating their interface. Most online brokers do have resources for investment advice or strategies, but will not work with you one-on-one.
Since online interfaces are cheaper that maintain than brick and mortar offices, online brokers usually have lower commission and trading fees. Costs are usually determined on a per-transaction of per-share basis. If you feel comfortable managing your own investments or you want to learn to invest without a lot of financial investment or risk, a discount broker might be a good idea.
Discount Brokers with Assistance
Discount brokers with “assistance” are essentially the same as online discount brokers with one important exception: They offer extra brokerage assistance for a small account fee.
Usually, this assistance is small and only covers basic investment tips and does not involve helping you create a long-term investment plan or giving specific investment advice. Most discount brokers offer some kind of assistance for a nominal fee and provide extra resources for a premium.
Full-service brokers are part stockbroker part financial advisor. Full-service brokers sit down with you face-to-face to create a financial plan for your unique situation.
Full-service brokers take account of your income, marital status, age, risk tolerance, assets, debt, and more to help you reach your investment goals. Full-service brokers usually also offer tax advice, retirement planning, estate planning and more, hence why there are called “full service.”
Fees for full-service brokers are usually much more expensive than discount brokers but the extra cost is paying for expert financial advice. Full-service brokerage accounts normally have minimum investment limits. These minimum amounts can range anywhere between $0-$2,500, while top investment firms may require minimum investments of several thousands of dollars.
Money managers are like financial advisors but basically take full discretion over their client’s finances. Money managers usually work with very wealthy individual investors and handle every aspect of their finances.
Since these professionals are highly skilled, they can charge very high service fees based on the total amount of assets under control, not per transaction. Money managers are basically used by very wealthy investors who don’t have the time to manage their money on their own. The top money managers have minimum investment amounts up to $250,000 or more.
If you are just starting out with investing, we would recommend starting with a discount broker with assistance to get your feet wet and gain some experience and capital. Start with very small investment amounts so you can get used to the ebbs and flows of the market and how to navigate buying/selling securities. That way you can get some practice without incurring a ton of financial risk.
Once you build up some wealth and want to take your investing to the next level, consider working with a full-service brokerage firm so they can help you figure out your financial goals and make smart investments.
Of course, many intrepid individuals manage their finances entirely on their own without the assistance of a stockbroker, which brings us to our next section…
How to Buy Stocks Without a Broker
Opening a brokerage account is probably the most common way you buy and sell investments, but it’s not a necessity. Many new investors initially opt for a brokerage account as it provides order and structure to investing and often comes with expert advice.
However, even brokerages come with some risks. There is always the possibility that your broker makes a fatal error and absolutely tanks your portfolio and stories of broker fraud boost those fears.
There may come a time when you want to manage your investments directly without the help of a broker. The good news is that it’s totally possible to directly invest your funds without going through a broker.
A few general notes: Individual investing is hard and requires a lot of research and perseverance. Since you won’t be working with a firm dedicated to charting market trends to find smart investments, you will have to do all that work on your own.
Also, many brokerage accounts opened with firms are insured in case of brokerage failures. If you are investing on your own, your funds will likely not be insured so if you have a catastrophic loss you won’t be reimbursed. The benefit is that you are in complete control of your finances and have more flexibility with your investment options.
Here are a couple different options for buying/selling stock without a broker. The point of this guide is to provide some info so you can decide whether using a stockbroker is right for you.
Direct Stock Purchase Plans
A Direct Stock Purchase Plan (DSPP) allows individual investors to buy stock directly from a company. DSPPs were conceived generations ago as a means to let smaller investors directly buy stock from a company. DSPP plans are usually run directly through companies and may involve third-party administrators.
Here is how a DSPP works: First, you find a DSPP for the company you want to invest in and create an account with them. The investor makes monthly deposits to the company which is used to purchase stocks. Every month, the deposited amount is used to buy stocks and every month the company generates statements that document your amount of owned shares and any recent purchases or sales.
Usually, DSPPs have commissions fees; normally to the tune of 1-2 cents per share for each purchase. These fees are usually much lower than transaction fees at a full-service broker.
The main benefit of DSPPs is they make it easy to automatically accrue shares in a company. Most DSPP plans are automatic and monthly transactions are made without direct involvement from the investor. This makes DSPPs a great option for first-time investors as they are cheap to enroll in, have low minimum investment amounts (~$100-~$500), and have relatively low risk.
However, the rise of the internet has made DSPP plans not as attractive as they were in the past. In the past, DSPPs were great because they let you avoid the high fees for using a full-service broker, which you had to use to invest back in the day. As online brokerages have gained in popularity and gotten cheaper, the benefits of DSPPs have faded.
For instance, one benefit of DSPPs in the past was that customers did not have to procure physical certificates of proof of purchase as the DSPP transactions were directly recorded in the company’s books. Nowadays, most stocks are kept in electronic form so the benefit is somewhat moot.
Also, relying entirely on DSPPs makes it harder to diversify your portfolio, an absolute necessity if you want to insulate yourself from risk. You would have to be enrolled in several DSPPs across industries to adequately diversify your portfolio.
DSPPs also involve account and transaction fees but now online brokers offer very cheap fees that make this advantage is no longer a big deal. For instance, in 2019, both Fidelity and Charles Schwab dropped commission fees for basic trades on their mobile apps.
Dividend Reinvestment Plan
There is also the option to sign up for a dividend reinvestment plan (DRIP). The main feature of DRIPs is that they let you reinvest any income generated from stock dividends to buy more shares. DRIPS are usually integrated with DSPPs so that buying, selling, and reinvesting can be essentially automated.
Here is how a DRIP works: First, you open a DRIP account with a stock transfer or other sponsoring financial institution. When you set up an account, you set up purchasing preferences and money is taken from your accounts to purchase stock shares. DRIP accounts then give you the option to reinvest either all, none, or some of your dividends to buy more stock.
DRIPs are a good option for long-term investors who want stocks that produce high long-term dividends and provide regularly reinvestment opportunities. For instance, Warren Buffet, the so-called “Oracle of Omaha” and CEO of Berkshire-Hathaway, has accrued much of his vast fortune by investing in companies that produce good long-term dividends and reinvesting those funds.
one major drawback of DRIP accounts is that it’s hard to quickly sell off and liquidate your stock assets. You would first have to go through the transfer agent which could take up to a week. In some cases, this can be a good thing as it might prevent you from making rash investment decisions.
DSPPs and DRIPs are probably the most common direct stock buying schemes, but there are several other specialty accounts usually available to others who have a lot of wealth. For example, a Direct Registration System (DRS) allows investors to have securities directly registered with the issuer’s records.
Basically, Direct Registration Systems work through a brokerage, but the stock is registered under the individual investor’s name, not the brokerage firm. DRSs insulate investors from brokerage risks and give direct correspondence with the company itself. Also, DRSs make it easier to use other stock buying plans like DSPPs and DRIPs.
There are a ton of other specialty accounts out there and we don’t have the room to cover them all. Suffice to say, the main point of these accounts is that they let you buy and sell stock more or less directly through a company, without having to go through a brokerage firm.
Online Brokerage Accounts
Technically, online brokerage accounts are investing through a broker. However, unless you pay extra from advice from your brokerage firm, you will basically be investing on your own. Online brokerage accounts have slowly been replacing traditional methods of direct investment by providing everything you need to trade in a convenient user interface.
Online brokerages offer very low account fees and many have entirely eliminated trading fees for basic transactions. Other non-broker methods of investment usually have fees too, so at this point, it might be a better option to invest directly through a discount broker.
In other words, online brokerage accounts, although they are technically through a brokerage firm, have become a great way to invest individually without much oversight. The only thing you will be paying for is a small fee to maintain the trading infrastructure.
The general trend is that the internet has removed a large portion of the need for full-service brokerages. For example, many people in the past relied on full-service brokers to obtain and organize physical documents related to stock ownership. Now that practically all of those documents are stored digitally, there is really no need to go through a full-service broker for them.
When Should I Use a Stock Broker?
You Need to Plan for Retirement
One of the most effective uses of stockbrokers is planning for retirement. Full-service stockbrokers can help you chart out a long-term financial plan so you can start investing for your retirement.
It can be very difficult for an individual to plan their investments for retirement, especially if they deal with other investments. Retirement requires long-term planning and sometimes the best option is to hire an expert.
You Don’t Have Time to Self-Manage Your Money
Another good reason to use a stockbroker is if you cannot spare the time to manage every aspect of your investments. Most people who invest have day-jobs they need to focus on, so they can’t spend all their time and effort managing investments. Hiring a brokerage gives you peace of mind as you know your investments are being managed responsibly while you handle your other obligations.
You Have a High Income
One reason why many people do not opt for a broker is that they have a small enough amount of assets they can manage on their own. If you have a high income, then you might not be able to keep track of everything on your own. Also, if you have a higher income, then the brokerage fees will not put as much of a dent in your bottom line.
You Have a Diverse Range of Investments
Another good reason to use a broker is if you have a highly diversified portfolio. Different kinds of securities have different rules and regulations, and sometimes it takes the touch of a qualified expert to navigate the vagaries of securities law and taxes. Moreover, expert broker advice can give you securities-specific advice.
When Can I Go Without a Broker?
You Have Experience With Trading and Financial Planning
If you have previous experience with day trading and financial planning, feel free to invest on your own without a broker. The main reason to hire a full-service broker is for expert advice. If you are an experienced trader already, then the only expert advice you need to rely on is yourself.
You Have Small Investments
Another good reason to go without a broker is if you are investing small amounts. If you are making small investments, then it is unlikely that any gains you make will cover applicable brokerage fees. If you are primarily concerned with small stocks at the beginning, it may be best to go it on your own for a bit.
Since you are dealing with small amounts, the risk is negligible. Most full-service brokerage firms have minimum investment amounts anyway, usually around $1000. If you are investing less than that, feel free to manage your funds on your own.
You Want Autonomy
Another major reason people invest on their own is that they want autonomy and complete control over their finances. While brokerages usually operate based on fiduciary duty towards clients, they can still mess things up and brokerage fraud is a real thing.
Handling your own finances can be difficult, but if you value your autonomy in the stock trading sphere then it is worth it. Forgoing a brokerage account also means you can more quickly buy and sell securities as you won’t have to go through a broker to make transactions.
You Have a High Risk Tolerance
One reason many people opt for stockbrokers is that they minimize risk with investments. The majority of brokerage accounts are made out of stocks and bonds are set up to be long-term investments.
As such, working with a brokerage account may not be such a good idea if you are interested in more high-risk/high-reward investments. Investing on your own will allow you to take more risks with your investment portfolio, though this also means that you can get hit much harder if you make the wrong call.
Step-By-Step Guide on How to Invest Using an Online Broker
We want the individual investor to be as successful as possible so we put together this step by step guide on exactly how to open a brokerage account, how to make your first investment, and how to keep your investments within your personal parameters.
Step 1. Open an online brokerage account
In the past, stock trading took place exclusively in physical locations called stock exchanges, the New York Stock exchange being a famous example. Now, most stock exchanges are done via the internet, although physical stock exchanges still exist.
If you are going to use an online broker the first thing you have to do is set up an account. Setting up an account is pretty simple and is a lot like opening a checking or savings account.
First, you find the online broker you want to open an account with and fill our the requisite applications. You will most likely have to provide some proof of ID such as a driver’s license or passport.
Most online brokerages can have your account set up in just 15 or 20 minutes so you can immediately get to trading. Most online brokers require some small account activation fee. Before you can start to invest though, you need to deposit funds into your brokerage account.
There are a lot of ways to do this. The most common methods are depositing money via check, via wire transfer, or and AC transfers from a checking or savings account.
Depending on the broker, there may be a minimum amount you have to deposit before you can trade. Ally Invest, for example, does not have a minimum deposit to being trading.
Step 2. Pick Your Stocks
Once you have some dough in your account, it’s time to get to trading. The stocks you pick depends on the kind of trader you want to be. Warren Buffet, for example, has frequently claimed that you should invest in a company with the aim of owning it, not because you think the stock price will rise.
When planning which individual stocks to buy, it is imperative that you research the company using fundamental or technical analysis methods. There are a lot of websites out there that give you access to technical analysis tools so it’s recommended that you spend some time playing around with those.
One of the simplest ways to gauge the health of a company is by looking at their annual reports which should give important information about their yearly cash flow, stock share price, and trends or developments investors should be aware of, and other general happenings within the business.
Specific important metrics to look for include a company’s revenues, net cash flow, profit margins, historical growth patterns, and return on equity. Looking at these factors should give you a good idea of which stocks are in good shape and which might be failing.
Step 3. How Many Shares Should you Buy?
Once you find some choice stock you need to figure out how many you want to buy. You need to buy enough stock so that your returns are worth it, but not so much that you accrue unnecessary risk.
We recommend starting small just to learn the ropes and get a feel for how stocks move and change value over time. You should also try buying a diverse amount of small stock in different sectors to get used to diversify your portfolio.
As you get more comfortable trading stock, figuring out the right ratios will come more intuitively. You should also be aware that many brokerage accounts collect a commission on each trade
. However more and more big-shot brokerage firms like TD Ameritrade, and Charles Schwab have done away with fees on regular stock transactions. It’s relatively easy to find a decent online brokerage that does not have commission fees on regular trades.
Step 4. Understanding Stock Order Types
As you are trading you will probably hear a lot of jargon that is unfamiliar at first. Here is a quick glossary of some stock order terms that you should probably know:
- Ask: This is the price set by sellers that they are willing to accept. The asking price may be higher than the actual market value so double check before buying.
- Bid: With bid orders, the buyer controls the stock price. The bid is the price buyers are willing to pay for the stock.
- Spread: The spread is the difference between the lowest ask price and the highest bid price for a given stock
- Market Order: A request to immediately buy or sell stock
- Limit Order: An order meaning you are willing to wait until the stock meets a certain predetermined value
- Stop-loss Order: One the stock hits this price, a market order is executed and the whole order is filled at whatever price point wins
- Stop-limit Order: Once the stock reaches a specific stop price, it becomes a limit order and is filled
Basically, whenever you want to buy or sell a stock, you’ll have to issue a market order. The market order signals that you want to buy or sell at the best available market value.
Keep in mind that the amount you pay may not be the exact amount that you were quoted just a bit before. This is because stocks can change value in literally minutes or seconds. That is why it is best to try and buy when the stock is not fluctuating.
Step 5. Optimize Your Portfolio
Once you get used to trading some stock, it’s time to optimize your portfolio. The single best way to do this is to diversify. You’ve heard the expression “don’t put all your eggs in one basket,” right?
The same is true in the stock world.
You never want to invest all your funds into a single stock, business, or even entire sector. Your investments should be spread over a wide range of investment types in several different sectors.
The benefit of diversifying is that it insulates you from risk. If your investments in one sector have a bad quarter, it’s ok because you have other investments in unrelated sectors that are independent.
At the same time, you should gain intimate knowledge of the niche area in which you are investing. If you are investing in niche electronics, then you should probably become a self-styled expert in the field so you can recognize trends. Without that key expert knowledge, you will be unable to tell when something really great comes along that can change the state of the market.
Imagine the people who are kicking themselves because they didn’t invest in Apple 40 years back. Don’t be one of those people. Learn your industry backwards and forwards so you can make smart investments.
Try These 6 Trades With Your Broker
We covered a few of these terms above but in the following sections, we will go more into detail about some different kinds of trades you can try with your broker.
We mentioned theses above as the most common kind of stock order. Market orders can be bought/sold immediately and have the lowest commission fees (or no commission fee, depending on the broker). When you are browsing stock and find one you like, you can put out a market order to immediately buy it for the price.
The next are limit orders. Limit orders are where buyers or sellers can place a specific price on some security. You get to set the price you are willing to pay for a stock. So for example, if you want to buy shares in Disney or Apple but want to wait till the price drops, you can set a limit order to buy when the stock value drops below $180 a share.
You cannot just buy huge amounts of shares all at once. Many brokerage firms prevent this kind of behavior because they don’t want individuals flooding the market with a massive single order. Some investors want to place an order at a single price. An all-or-none order tells your broker you will only trade if it can be done in a single transaction.
All-or-none order can be tricky to pull off as there may not be enough shares to cover the purchase They will also not be placed if there are any normal orders before it.
Stop Loss/Stop-Limit Order
Most beginners do not get into stop-loss orders until the get a bit more experience under their belt. A stop order automatically changes into a market order when a preset price is matched. This is called the “stop price.” Stop limit orders work exactly the same but they turn into limit orders when a certain price is reached.
Selling short is a good strategy that can get you a lot of money but opens you up to a lot of risks. The idea is simple: a person borrows a stock, sells the stock, and buys the stock back and returns it to the lender. The borrower bets on whether the stock they sell will drop in price.
Since the borrower is making a bet here, there is a real risk it can turn out badly and they can lose their initial investments. Selling short is an advanced technique that you should only try if you have a solid grasp of fundamentals analysis. And know what signs to look for falling stock.
Extended Hours Day Trading
Whenever you place a market order, it is only good until the expiration date. For most market orders, this date is just the end of the trading day. If you don’t make the trade by the end of the day, the order gets canceled.
If you want, you can try extended day trading. Extended hours lets you buy stock between 9 PM and 8 AM when the market is closed. Extended trading hours allow investors to react to corporate new prior to the next opening session.
There are also good-til-0cancelled orders (GTC). These orders remain open until something specific happens, such as they get filled, you cancel the order or a specific time period passes. You have to pay an extra commission each day that your order is partially filled.
A quick note here: Currency markets like the forex and cryptocurrency exchanges are open 24/7 so there is no extended hours trading in those markets.
It has never been easier to get into the world of stock trading. Along with traditional full-service brokers, the internet has paved the way for more autonomous investing in the form of online brokers and robo-advisors. Now, anyone can invest from wherever they want; all they need is some spare change to get started.
If you are wondering whether you should opt for using a brokerage firm, you need to first ask yourself some questions about your finances and long-term financial goals. Whether or not you should work with a stockbroker depends on your unique financial situation, long-term financial goals, and other factors like income, assets, and debt.
In general, we would say that working with a broker is a good idea when you need to plan for retirement or your long-term financial goals. The expertise and impartiality of brokerage firms and financial experts give you the objectivity you need to make the right call on those issues.
If, however, you have a higher risk tolerance and want more autonomy over your finances, then it is very easy to manage your investments on your own. You will have to do more individual research and be ever vigilant, but playing the market by yourself can pay off big time.
No matter which option you choose, it always helps to learn about the financial basics of the stock market. There are tons of free online resources on how to buy and sell stock that you can peruse at your own leisure.
Gone are the days of investing being locked behind gratuitous fees, incomprehensible brokerage jargon, and procedural red tape. Now you can do it all from the comfort of your own home.