Getting started with trading stocks online has never been easier, but it still pays to do some research. Novices who are familiar with a few concepts can maximize the profitability of their trades and avoid some common pitfalls. The guide that follows covers these basics, along with a few more advanced subjects.
Taking the First Step: Choosing a Broker
In order to trade stocks online, it will be necessary to first set up and fund an account with a broker. There are many options to choose from, each with its own particular focus and approach.
Fortunately, many online brokers today are well suited to everyone from beginners to experienced professionals. Some of the issues it will pay to look into when comparing brokers include:
1. Commission: Even a nominally successful stock trade can end up being unprofitable if it costs too much to execute. As recently as the 1980s, it was common to pay $50, $100, or even more to have a broker arrange a single trade. Things are much more favorable for investors today, with some brokers even allowing investors to trade commission free. The more actively you plan to invest, the more that per-trade commissions will impact your results.
2. Other fees: Most online brokerages charge plenty of fees beyond commissions, and these can add up, as well. Fortunately, many of these additional fees are of concern mostly to advanced investors who make use of tools like margin and short selling. Still, it will be wise to look over a brokerage's complete fee schedule before signing up, since fees for services like transferring a balance can still apply to beginners.
3. Features: Online brokerages range widely with regard to how much information and support they provide to their clients. Some include access to many more sources of stock research than others, for instance, while perhaps lacking advanced charting capabilities. In most cases, though, beginning investors will not need to worry so much about such issues until they become more established.
4. Requirements: Many brokers insist that new clients deposit a certain amount of money or maintain a minimum balance over time. Novice investors with very little money to commit will always need to be aware of such issues.
The Most Important Types of Trades for Beginners
With an account set up at an online brokerage and funded, you will be ready to actually start trading stocks. The tools used for this vary somewhat from one broker to the next, with everything from web-based platforms to standalone clients and mobile apps being available.
In most cases, though, the software used to place orders should be fairly straightforward. One of the points that most often trips novice investors up, though, is the fact that there are quite a few different types of orders which can be submitted. Those which are of the most interest to the average beginner are:
1. Market: Placing a market order for a particular stock means that it will be purchased or sold at the best available price for the indicated quantity at the moment. Naturally enough, this exposes investors to the possibility that market fluctuations between the time of order entry and execution will work against them.
2. Limit: A limit order does away with this risk by delaying execution until it can happen at the specified price. While limit orders provide an additional layer of security in this respect, they also expose investors to a different type of danger: that the order might not get fulfilled at all. Placing a limit order to sell a stock while its price is in free-fall, for instance, can leave an investor holding the bag when all is said and done.
3. Stop loss: Investors often wish to lock in certain levels of profits without liquidating their positions immediately. Stop and stop-limit orders are used to automatically buy or–more commonly–sell stocks when a certain price is reached. A stop or buy-on-stop order will be executed at current market pricing when the trigger price gets hit, while the stop-limit variations convert into limit orders.
There are a number of other types of trades that investors frequently make use of. Generally speaking, though, most novice traders will be able to put off learning about "trailing stop," "all or none," and "buy-to-cover" orders until they gain more experience.
It is important to understand from the beginning, though, that there are some time-related details that can impact trades. Every order that gets placed has an associated expiration, whether it is deemed valid for a single day or is flagged as "good-til-canceled" (GTC).
When placing a market order, it will not be necessary to worry about this distinction, as these automatically get canceled if they cannot be executed by the end of the trading session. A GTC order, though, will be left open until it is filled, gets canceled manually, or 60 days have passed since it was placed.
Becoming Familiar With a Few Tools for the Future
An understanding of the basics above should allow a novice investor to get started trading stocks, exchange-traded funds, and the like online. Investors who become more committed often find it worthwhile to start learning about more advanced but riskier possibilities like:
1. Margin: Borrowing money from a broker to fund a trade is called using "margin," and it can increase an investor's returns significantly when things go right. Most brokerages require that traders either open separate margin accounts or request authorization to use this service, however. Should a stock purchased on margin lose enough value, the account will become subject to a "margin call." At that point, the investor will be required to deposit enough cash or securities to bring the account back to a minimum ratio between debt and equity.
2. Short sales: Investors who believe a stock is about to drop in value can borrow shares from others, sell them, and then hand back the shares later on, hopefully after buying them at a lower price. As with margin, selling stocks short can produce large profits but also exposes investors to more risk.
3. Options: Although they are not stocks themselves, options are frequently used by traders who focus on equities. A call option conveys the right to buy a designated stock at a particular price on its expiration date. A put option does the same but for selling. Intermediate investors will often use put and call options to protect gains made from trading particular stocks. Still more advanced investors might trade options independently or even write them and sell them to others, accepting the risks associated with their exercise.
Many novice investors will never get to the point where they need to use relatively advanced tools like these. Even so, understanding the basics can make it less confusing to learn more about trading online.
In just about every case, novice traders who have questions will find that answers are readily available, with many brokerages today maintaining extensive FAQ collections and the like, for example. Trading stocks online can be as simple or sophisticated as anyone might want, which is part of what makes it so appealing to so many.