Stock marketing trading has been around for centuries, but lately, with the advent of the Internet, it has taken off to an entirely new level. Untold numbers of traders buy and sell stocks online these days because it is quick and easy – with far more access to stock exchanges than ever before.
If you want to learn how to buy and sell stocks, you need to know the basics of getting started. Here, I’ll cover the fundamental concepts of trading stocks online and how you can begin the process for yourself.
Getting Stated: Finding a Brokerage
Trading stocks online is made possible today through the use of online stock brokerages, which operate almost exactly like traditional stock brokerages full of professionals who place your orders with the system (i.e. the big boys in downtown New York City on Wall Street). An online brokerage differs from an offline one in the sense that they usually don’t offer financial consulting as a major part of their business.
A brokerage gives you trading access to the market through something called a trading platform, or an online portal that you can use to place orders, view metrics and charts, and manage your accounts. These platforms – the actual pieces of software that let you buy and sell – range greatly in terms of scope, power, and flexibility, but they all have the same basic functions.
Finding the right broker for you ultimately comes down to a few factors:
- What asset class do you want to buy or sell? (Stocks, bonds, currency, etc.)
- How much are you willing to pay in commission or trading fees?
- How much capability are you looking for?
- Do they offer free trades, bonuses, etc?
- What is their minimum account requirement?
You can find a brokerage that is best for stocks, or one that offers free ETF trading, for example. Some have incredibly low fees – the lowest fee for an established brokerage is TradeKing, which offers $4.95 trades and broker-assisted orders (usually those are extra). Others may cost more but have more robust trading platforms, including proprietary platforms complete with real-time data, customizable interfaces, market research, and the like.
You can also find full-service firms that allow online trading plus the help of a trained financial advisor – but these services cost extra through fees or commission.
Determine your priorities. What do you really want in a brokerage? Write down your preferences for the list above and you’ll be able to more readily sort through the host of options out there.
Opening An Account
Once you have selected an online brokerage, you need to open an account.
Most brokerages today, in order to open an account, require you to supply them with your Social Security number, bank account information, and other identification. You don’t usually have to jump through hoops; opening new accounts is easier now than it has ever been.
The next step is to deposit your minimum requirement. Each brokerage has a minimum deposit that is required if you want to trade (although some brokerages, like Zecco, have no minimum for cash accounts). Fidelity, for example, requires $2,500 in your cash account and $5,000 in your margin account. Scottrade requires a $500 initial deposit, and E*TRADE requires a $2,000 deposit. TD Ameritrade is another major brokerage that doesn’t have a minimum for a cash account or a retirement account; you only need $2,000 in your margin account for margin trading.
Once you’ve created an account and been approved, you can start trading.
The basic gist of trading is this: You submit an order to the market saying that you want to buy a number of shares at a particular price. The order is routed electronically to the market, and is matched on the other end to people who want to sell a number of shares at a particular price. When the two orders meet in the middle, your order is executed. This all happens usually within seconds, although it can take longer depending on volume and liquidity.
You have two general types of orders at your disposal: limit orders and market orders. A limit order is an order to buy or sell a stock at a certain price. You use a limit order to avoid buying or selling above or below a certain amount.
For example, if the stock’s price is at $10 per share, and you want to buy 100 shares with a limit order of $9, your order won’t go through until the price reaches $9 or lower.
So, if you have $900 to invest, and want to buy 100 shares, you know that the price has to drop by a point in order to make it happen.
Selling with limits works the same way. If you have 100 shares at $10 per share, but want $100 in profit, you can put a limit order to sell at $11. If the price doesn’t reach $11, your order doesn’t go through.
Note that it’s possible that your orders are never fulfilled. If the price doesn’t reach $11, for example, you don’t sell anything.
A market order is much simpler. Market orders are executed at what the stock’s price is now. You don’t have any control over the price at which the order is executed. If you place a market order for $10, and the order isn’t executed right away thanks to market volume, then you could wind up buying for $10.10, or $10.50, or worse.
Market orders are useful when you want to get in now and be assured that your order will be filled.
There are other types of orders – like stop orders, peg orders, fill-or-kill (FOK) orders, etc. But the two above are the most basic types that can help you get started trading.
The steps we’ve talked about are not exhaustive, but they should give you a pretty good grasp of the fundamentals of getting started in trading stocks in today’s online environment.