Can you buy stock online? Yes, you can. Becoming an online stock trader enables you to buy and sell stocks remotely and gives you access to all the necessary tools for improving your trading skills. While you can easily start trading online, you need to constantly advance your knowledge and skills if you want to become a profitable stock trader. Use this guide to learn how to successfully invest in stocks online.
Learn About the Stock Market
Image via Flickr by mytradingskills
Whether you’re trading online or offline, spend some time learning how the stock market works. This point is especially important if you’re new to stock trading.
The stock market is similar to other forms of marketplaces. The main difference is that the stock market facilitates the purchase and sale of pieces of ownership in companies. These pieces of ownership are called shares of stock, and they’re traded on stock exchanges. The New York Stock Exchange (NYSE) and Nasdaq are the two main stock exchanges in the United States.
Stock prices may rise or fall depending on supply and demand. When the demand for a certain stock is high, its price will go up because the stock is attracting more buyers than sellers. Conversely, the price will go down if sellers outnumber buyers. Basically, the price is a reflection of investors’ opinions of the stock, not necessarily the real value of the company. Therefore, short-term price fluctuations are usually influenced by people’s opinions and emotions rather than facts. Stock prices can fluctuate based on facts, misinformation, or rumors.
As a stock trader, your goal is to purchase shares that will rise in value over time. You should invest in a company that’s experiencing growth in sales and profits. If the price of its stock increases, you can sell your shares and make a profit.
In addition to this basic knowledge, you can read trading e-books and tutorials or watch videos that provide instructions on how to buy stocks for beginners. Tutorials and videos can offer tips and techniques for more advanced traders. Additionally, you should consider using a virtual trading platform to get hands-on experience with stock trading before investing with actual money.
Open a Brokerage Account
After you’ve gained substantial trading knowledge, you can start investing in the stock market. Where do you buy stocks online? Online trading is done through a brokerage. Before you choose a brokerage, you should know which type of brokerage account you want to open. Three types of brokerage accounts exist.
Online Brokerage Account
An online brokerage account is an online investment account with a brokerage firm. The account provider allows you to buy or sell stocks on your own through an online trading platform. If you want to manage your own investments, you should set up an online brokerage account.
Full-Service or Managed Brokerage Account
A full-service or managed brokerage account is a brokerage account managed by a human adviser or robo-adviser. The adviser will select and manage investments on your behalf so that you don’t need to get involved in the trading activities. A robo-adviser uses computers to make decisions, and the process is usually less costly than a human adviser.
Retirement Investment Account
A retirement investment account refers to a tax-advantaged brokerage account specifically designed to help you grow your retirement savings. Examples of this type of account include IRA and Roth. You should consider opening an IRA if you wish to invest for retirement, you’ve already contributed enough to get a 401(k) match, or your employer offers a 401(k) program. You can create an IRA account with an online brokerage or robo-adviser.
Choosing a Brokerage
After you’ve determined which type of brokerage account you want, you can proceed to choosing an account provider. When you’re selecting a brokerage, look for a reputable one with low account fees and commission. You’ll want to consider how much the brokerage charges for the type of investments you’re interested in. If you’re planning to trade stocks, find a brokerage with a low trading commission. This point is especially important if you intend to trade frequently. For mutual funds, work with a brokerage that offers exchange-traded, commission-free, and no-transaction-fee funds.
The following lists common investment and brokerage fees:
- Brokerage fee: A brokerage fee is a fee charged by the brokerage that holds your investment account. It includes an annual fee for maintaining your brokerage account, a fee for accessing trading platforms, a subscription of premium investing data and research, and inactivity fee for infrequent trading.
- Trade commission: Also known as a stock trading fee, a trade commission is a brokerage fee charged when you purchase or sell stocks. You may also have to pay a commission or fee when you buy or sell other investments, such as through options trading and exchange-traded funds.
- Management or advisory fee: This fee is typically a percentage of your assets under management. It’s paid to a financial adviser or robo-adviser.
- Mutual fund transaction fees: Mutual fund transaction fees are brokerage fees incurred when you buy or sell mutual funds.
- Sales load: This sales commission or fee gets paid to a salesperson or broker who sells a specific type of mutual fund.
- Express ratio: An express ratio is an annual fee that applies to investors who trade mutual funds, exchange-traded funds, and index funds.
- 401(k) fee: This administrative fee is charged for maintaining a 401(k) plan.
If you have a limited amount of money to invest, you should choose a brokerage that has a low account minimum. The minimum for a regular brokerage account can vary from $0 to $2,000 or more. Many online brokerages have a $0 minimum requirement for setting up a Roth or IRA account.
Also consider how much support the brokerage offers. Support offerings such as educational tools, stock-trading research, investment guidance, and access to customer support via phone, email, and online chat can go a long way toward making your trading activities and troubleshooting more efficient and effective.
Starting a Brokerage Account
Setting up an account with a brokerage is as easy as opening a bank account. All you need to do is complete an application form, provide proof of identity, and select how you intend to fund your account. You can deposit money into your account either by transferring funds electronically or mailing checks.
Choose Your Stocks
After opening and funding your brokerage account, you can start selecting stocks. Before you decide to buy a certain stock, you should know that you’re becoming a part-owner of the issuing company. Short-term fluctuations aside, the value of your investment depends on how well the company performs. Follow the steps below to make well-informed choices.
Be Knowledgeable About Company Stocks
Consider starting with a company you’re familiar with. Knowing some basic information about the company, its product and service offerings, and recent investor news can help you place the company’s financial reports in context. Make a point to avoid hyped-up stocks. Many investors buy these stocks without full knowledge of how the companies plan to make money. In many cases, the companies themselves don’t have a clear idea either.
Consider Price and Valuation
Experienced investors usually look for cheap or undervalued stocks, stocks with low price-to-earnings (P/E) ratios. Generally, a P/E below 15 is considered inexpensive, while a P/E above 20 is regarded as expensive. A company expected to experience rapid growth will have stock that may be more costly than an established company experiencing slower growth. To find out how a company’s stock stands up to the P/E of its peers, compare its P/E to the ratio of other companies in its industry.
Keep in mind that an inexpensive stock isn’t always a good investment. Sometimes, a stock has a low P/E because the company is growing less or slowing down growth. Also, a stock may be expensive because the company is expected to increase its earnings rapidly over the coming years. You want to choose stocks that have a reasonable chance of becoming more valuable in the future. Take both value and projected future earnings into consideration.
Evaluate a Company’s Financial Health
Evaluate the company’s financial reports. Every public company is required to release quarterly and annual financial reports. You can find these reports in the “Investor Relations” section of company websites or the U.S. Securities and Exchange (SEC) website. You shouldn’t look only at the most recent report. You need to know that the company has a consistent history of good financial health and profitability.
Check the company’s revenue growth. Anything can happen from one day to another, but over the long run, the price of a stock increases when the company makes more money, which typically begins with growing revenue. In stock trading, revenue is referred to as the “top line,” but you should also look at the bottom line, the company’s income after the deduction of all expenses from its revenue. A company that’s able to grow its revenue while controlling expenses will have expanding margins.
Review a company’s balance sheets to find out how much debt it’s carrying. In general, a company with a larger amount of debt will have a more volatile share price. More of its income will go toward debt repayment. Compare the company to its peers to determine if its debt is unusually high for its size and industry.
Finally, find out whether the company is paying dividends. Dividends are cash payouts to stock investors. Besides being a source of income, they also serve as a sign of good financial health. If the company pays dividends, check the history of its payments to find out whether its dividends have been increasing or decreasing.
Avoid the following activities when you’re buying stocks:
- Buying on price alone: You shouldn’t assume a certain stock is a good investment because its price has dropped 10 percent. Make sure you know why and how the price is going to rebound.
- Relying too much on analyst recommendations: Reading analysts’ reports is one of the best ways to get information about a company’s financial health. However, you have to know that they can be biased when it comes to “buy” ratings. As a result of this bias, “sell” ratings from analysts may be red flags, especially if they’re new “sell” ratings.
- Being surprised by volatility: Individual stocks are always more volatile than diversified mutual funds. If you’re interested in buying a stock, look at its 52-week highs and lows to get an idea of how widely its price can fluctuate within a year.
- Forgetting to sell: While you need to have an effective strategy for buying stocks, you should also know when to sell them. Create a list of requirements that can help you determine the right time to sell, such as upper and lower limits for price movements, dividend cuts, and analyst downgrades. If you have a plan for selling, you can avoid selling out of panic with short-term movement in the market.
Decide the Number of Shares to Buy
Deciding how many shares to buy is a matter of risk control. In the long run, risk management may contribute more to your success as a trader than the selection of stocks. As a general rule of thumb, you should only risk an amount you can afford to lose. This guideline can help you stay calm and avoid making emotional decisions when your stocks move against you.
The number of shares you buy shouldn’t depend on how much money you want to make. Instead, your buying decision should depend on how much money you can risk comfortably. If you’re a beginner, consider starting small by buying a single share to get an idea of what it’s like to own an individual stock and whether you have what it takes to ride through a rough patch with minimal stress. You can increase your position as you become more familiar with the stock market.
Many trading experts recommend risking no more than 5 percent of your portfolio at any time. This percentage is the maximum you should risk when the best opportunities arise. During uncertain times, it’s prudent to risk no more than 1 percent.
Select Your Order Type
Before you choose your order type, you need to understand certain stock trading terms found in the order page, such as the following:
- Ask: The stock price that’s acceptable to sellers.
- Bid: The stock price buyers are willing to pay.
- Spread: The difference between the lowest stock ask price and the highest stock bid price.
- Market order: A request to trade a stock as soon as possible at the best possible price.
- Limit order: A request to trade a stock at a specific price or better.
- Stop-loss order: When a stock reaches a price level called the “stop price,” the trade becomes a market order that’s entirely filled at the current price.
- Stop-limit order: When a stock reaches the “stop price,” the trade becomes a limit order that’s filled to the point where certain price limits can be met.
Many complex order types and sophisticated trading moves exist, but you don’t have to know all of them to become a profitable trader. Many investors have achieved great success by relying only on two order types. These types are market orders and limit orders.
When you place a market order, you decide you want to trade a stock at the best current market price available. Since this action doesn’t put price parameters on the trade, this type of order will be executed instantly and filled entirely, unless you’re buying a million shares or attempting a takeover coup.
You shouldn’t be surprised if the final execution price is different from the price you may have been quoted seconds ago. Bid and ask prices move constantly throughout the day. As such, a market order is the ideal order type for trading stocks that aren’t susceptible to wide price swings, such as large, steady blue-chip stocks. These types of stocks are good options for buy-and-hold investors who are more concerned with ensuring that their trades will be fully executed rather than through small differences in price.
If you place a market order after trading hours, the order will be accepted at the prevailing price when the stock exchanges open for trading again. Make sure you check your brokerage’s trade disclaimer. Some brokerages bundle all their customers’ trade requests and execute them all at once, either just before the market closes or at a specific time during a trading week.
With a limit order, you’ll be able to have your trade executed at a specific price. If a specific stock is trading at $10 and you think that the stock in question will drop to $9.50 based on how you value the issuing company, you can use a limit order to tell your brokerage to hold tight and execute the order only when the ask price falls to that level. If you’re selling, your limit order tells your brokerage to only part with the shares when the bid price rises to your desired level.
A limit order is more suitable for investors who trade smaller stocks that tend to have wider spreads. Limit orders are also commonly used when the stock market experiences short-term volatility or stock prices matter more than order fulfillment.
You can include additional conditions in a limit order to control the amount of time it’ll stay open, such as the following:
- All-or-none (AOPN) order: This type of order will be executed only when every share you want to trade is available at your set price limit.
- Good-for-day (GFD) order: This type of order will be canceled at the end of the trading day, regardless of whether it has been fully filled.
- Good-till-canceled (GTC) order: This type of order will remain in play until it expires or you cancel it, which can be anywhere from 60 to more than 120 days.
Although a limit order ensures that you’ll get the price you want if the order is executed, it offers no guarantee that the order will be fully or partially fulfilled. A limit order can only be placed after market orders are filled and the stock remains within your desired parameters long enough for your brokerage to execute the trade. Limit orders are placed on a first-come, first-served basis.
You should also know that a limit order can cost more money in commission than a market order. If the order can’t be fully executed at one time or during a trading day, the order may continue to be filled over the following days, with transaction fees charged each day a trade is executed. If the stock expires before it reaches the level you set for your limit order, the trade won’t be executed.
Optimize Your Approach
Most stock traders hope that they can stay in the game as long as possible, but circumstances can turn difficult every now and then. Remember that all investors, even successful ones, go through rough patches.
In order to come out ahead in the long run, you need to keep your perspective and focus on the factors that you’re able to control. While you can’t control market gyrations, you can increase your chances of success by constantly educating yourself about stock trading, staying abreast of the latest developments in financial markets, doing proper research before investing, and being mindful of investing fees. You should do all you can to minimize your costs and risks while maximizing your profit potential.
While it’s a potentially lucrative activity, stock trading can also involve some risk. If you dive into it without proper knowledge and a well-planned trading strategy, you can liquidate your account quickly. However, if you invest enough time and effort to understand stocks, you can turn online trading into a steady source of income year after year. To learn how to buy stocks online like a trading professional, consider joining the seven-day RagingBull.com bootcamp for free and receive trading tips and techniques from seasoned traders who can help you make informed trading decisions.
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