How to buy stocks online
Buying stocks online is no harder than buying any other product or service online. Online brokers could best be described as “discount brokers,” in that they heavily discount the commission charged in favor of providing a cheap, easy to use service that requires very little effort on their part.
Basically, they just take orders. Some of the online brokerages provide a research facility, some of which are fairly sophisticated, but on the whole they offer no real advice.
It really is easy – Here are the steps
1. Open an online trading account
2. Deposit some money
3. Go to your account and click the “buy” button
Of course, this would be a very short article if I stopped there and the real questions should be “Which online brokerage should I use, where do I find them and how do I pick the broker that is right for me?”
How to Choose an Online Brokerage
About.com has a reasonably good guide to some of the criteria used to rank a website, and I have added a link to it in the capsule. Unfortunately, they are using the criteria that ranks a website as regards traffic flow, unique visitors, time spent at the site etc, which I very much doubt is relevant to how good a broker is. It might tell you how good their marketing department is, but that’s not really the question. About seem to have stopped bothering to update their sites as well, so this could be out-of-date on a few items.
The best times to use an online broker rather than a traditional broker are:
* When you have a good grasp of the market and have a fair idea of the stocks you are interested in and don’t feel you need or want any advice. They are much cheaper than the traditional trading houses.
* When you want to day trade. That is, you want to be able to buy and sell shares on a day-by-day or even minute-by-minute basis to take advantage of any shifts in the markets. Most of the online brokerages offer real time trading and can execute a trade almost instantly.
Online Stock Brokers
Different brokers offer different platforms, research facilities and prices. These are some of the the most popular ones.
E*Trade have access to 7 markets and 6 local currencies: France, the U.K., Germany, Hong Kong, Japan, the United States, and Canada. They offer options trading, futures trading and stock trading. The have a pretty good research section, very fast execution and a variety of online learning tools and advice. Just remember – you get what you pay for and most of these tools are free. Commissions range from $6.99 to $9.99 depending on your activity level. The more you trade the less the trades cost. As with forex trading, it makes no difference to the broker whether you make or lose money – they get paid regardless. The Wall Street Journal’s Magazine, Smart Money voted them the number One Premium Broker in 2007, so they must be doing something right – or paying the right ad agency
Ameritrade recently purchased TD Waterhouse’s Online trading division. They now call themselves TD Ameritrade. Since the acquisition, they have become one of the largest. The difference between them and most, is the fact that they have over 100 branches spread around the U.S. where you can meet with a consultant to review your financial goals. I would class these as less of a day trading site and more a long term planners. They charge $9.99 per trade regardless of the amount of shares you buy. If you sign up with them, you get 30 days of free trades plus $100 cash added to your account - As long as you fund it with a minimum of $25,000. Just like the other houses, they offer the usual instant real time trading and a host of tools and pre-set formulas for trading – personally, I think they are a waste of time. If it was that easy to predict which way the market was going, everyone would be millionaires. Barrons voted them number One.
Share builder is the brokerage division of ING DIRECT. They have a variety of trading options – auto investing, real-time trading and options trading. It’s fair to say, this company is an online bank first and a brokerage second. One thing that disturbs me about this company is the fact that they are actively pushing you to use some sort of leverage, and if you don’t know what that means, stop reading now and go buy a book on stock trading. Their catchphrase is “Buy today, fund tomorrow.” I don’t like this sort of sales pitch from what is supposed to be a reputable bank, and I promise you – both the internet and the stock market will be there tomorrow. They charge $9.95 per trade, which seems to be about the norm,
Scottrade offer trades for $7, which is a flat rate commission for all their online market and limit equity orders. This flat rate applies regardless of how many trades you make, unlike some of the other brokers where you pay less the more trades you make. They offer three different trading platforms, becoming more sophisticated as you desire better, faster information. Once again, you must decide whether you are in for the long haul, or wish to day trade. The more sophisticated the platform, the more money you must deposit. The odd thing about this site is that if you elect to use their “Elite,” platform, you must deposit a minimum of $25,000, but should you lose any money and allow your balance to fall below this, they will take away your access to the platform. As with all these online brokers, it is wise to remember they are not your friend – they are there to make money and will do so regardless of your success or failure. J D Power rated them “Highest in Investor Satisfaction With Online Investment Services.” It would seem there are enough awards to go round.
Fidelity sell IRAs, and offer online trading. The more active a trader you are, the lower the commissions, ranging from $8 a trade to as much as $19.95 plus a $.015 per share over 1000 shares. Smart Money voted them “Best Premium Discount Broker,” and they make much of comparing their prices to several other brokers, claiming to be the lowest. Of course, there are a lot of stipulations and if you are not trading online, or if you are buying over a certain number of shares there is extra to pay and if you are making less than a certain number of trades, you will pay more also. I guess you could say that if you are unable to understand the small print, you should not be trading shares, but all of the brokers, with the possible exception of E*Trade do a pretty good job of giving you the impression they are cheaper than they are. With Fidelity, you will only be paying $8 a trade if you have at least $25,000 deposited, make more than 120 trades a year, never use the directed trading or extended hours and never buy more than 1,000 shares valued at less than $1.
Making Money Trading Stocks online
Unlike Foreign Exchange Trading, it is possible to make money trading stocks online with relatively small sums of money. It is advisable to avoid using any leverage until you fully understand the implications and possible pitfalls. If you are new to trading stocks online, I recommend buying a book or two and make sure you have a game plan before starting to trade. Yse, there is a LOT of information online as to the processes and suggestions for strategies, but much of this information is designed to sell you a product or get you to invest in a certain company. Much of the information you come across will be untrue, or worse - a sales pitch. I recommend avoiding anything that begins along the lines, “How to make millions trading online,” or any other such spurious claim. You can make money trading online, no question, but you can also lose it.
Despite the many brokers claiming low charges, most of them do an extremely good job of disguising the true costs. All you see when you look at their sales pitch is “$9.99 Trades!” and while it is possible to get trades at this commission, generally there are a collection of rules, regulations and additional charges to take into consideration. They all charge in different ways, they all add charges that are at a different rate and they all claim to be the cheapest. Look very careful at their small print. The minute you step out of their narrow window of low trade commission for any reason, you will be paying more. Making less trades than you have agreed to do to get this price will affect the cost of ALL your trades. There is a reason Scottrade can afford to build a Hockey Rink – They make a LOT of money doing this. This doesn’t mean you can’t make money, because you can. Just look closely at the additional costs and requirements you need to meet to get these low commissions.
One of the most important aspects of trading online is money management. Do you have all your eggs in one basket? - So to speak. Do you have all your money tied up in one speculative trade or do you have a reasonable spread amongst long-term and short-term prospects. Is all your money in trades or do you have some of it in other investments. You can lose an awful lot of money in one trade if you are using margin and have it invested in the wrong stock, or the market moves the other way to your needs – in a very short space of time. The broker will shut you down as soon as you reach a negative equity position. Margin calls are the bane of the short term trader – once issued, they must be dealt with immediately, either by adding funds or closing the position.
Discount or Full Service?
The cost of a trade varies massively from brokerage to brokerage. Some claim charges as low as $1 and some charge as much as $30 per trade. Generally, the lower the cost, the lower the input and advice from them. It is good to remember that any broker is either an order taker, or a salesman.
It is also good to remember that they will make money whether you do or not. As a general rule, online brokerages make money by charging a commission. As an example, Fidelity charge $8 a trade – if you meet their requirements. Assuming you do meet all their criteria and actually get the $8 per trade – that means you have made a minimum of 120 trades – they will have charged you $960 – Minimum. So, you need to have made at least this much profit just to break even.
It is fair to say, the arrival of the online brokerage has made trading stocks and shares far more accesible to the man in the street. Gone are the days that this was exclusively the province of the already wealthy, but, the less you have to invest in stocks, the harder it is to make money as a day trader.