When venturing into the world of stock trading, engaging the services of a stockbroker is typically necessary, as you can't directly contact a stock exchange to make transactions. With a stockbroker—whether a traditional broker or an online platform—you have the ability to select the investments you want to buy or sell and specify how the trade should be executed.
There are primarily two types of brokers to consider: full-service brokers and online/discount brokers. We'll delve into how you can utilize these options to independently trade stocks.
Additionally, we'll explore a third alternative: direct stock purchase plans (DSPPs), which enable investors to acquire shares directly from specific public companies. This avenue allows for buying stocks online without relying on a broker. However, DSPPs come with limitations, as maintaining accounts with each company you own stock in can be cumbersome. Furthermore, the prevalence of commission-free stock trading offered by many online brokers nowadays often makes this route more convenient and cost-effective.
Where to Buy Stocks
Stocks are typically traded on licensed exchanges, where buyers and sellers convene with the assistance of intermediaries like brokers. These intermediaries, who are exchange members, facilitate transactions on behalf of investors. In the United States, prominent exchanges include the New York Stock Exchange (NYSE) and Nasdaq.
Alternatively, smaller companies with limited liquidity and modest market capitalization, often referred to as penny stocks, may opt to trade over-the-counter (OTC) on less regulated platforms such as the OTC Pink Sheets. OTC-traded shares tend to be more volatile and risky, necessitating additional due diligence from investors.
Using a Full-Service Broker to Purchase Stocks
When picturing investing, some envision full-service brokers, well-groomed professionals in an office engaging with clients. These are the classic stockbrokers who take the time to understand you on personal and financial levels.
They delve into factors like marital status, lifestyle, risk tolerance, age, income, assets, debts, and more to craft a comprehensive financial plan tailored to you.
By gaining insights into your life and finances, full-service brokers can offer guidance not just on investments but also on estate planning, taxes, retirement, budgeting, and other financial matters, hence the term "full service." They cater to investors seeking comprehensive support.
While full-service brokers typically charge higher fees than discount brokers, the value of having a dedicated human investment advisor can outweigh the extra costs. Nowadays, accounts can be initiated with as little as $1,000, making them accessible to many, especially beginners.
Buying Stocks Online
Investing in stocks can be done through two main avenues: online brokers and direct stock purchase plans (DSPPs).
Online brokers, also known as discount brokers, offer a cost-effective way to buy and sell stocks without the guidance of investment advisors. They operate solely as order platforms and charge fees per transaction. Setting up an account with an online broker is typically easy and can be done online with minimal initial investment. While these platforms don't provide any investment advice, they offer technical support and access to investment-related resources and research. Choosing an online broker is suitable for those who feel confident managing their investments independently or wish to educate themselves about investing.
Alternatively, some companies offer DSPPs, particularly established firms known as blue-chip companies. DSPPs enable investors to buy shares directly from the company without involving a broker. Each company's DSPP operates uniquely and is typically administered by transfer agents or third-party administrators. Investors interested in participating in a company's DSPP should reach out to the company's investor relations department for more information.
In summary, the choice between using an online broker or participating in a DSPP depends on individual preferences and needs. Full-service brokers are ideal for those seeking professional guidance, while online brokers suit individuals comfortable managing their investments independently. DSPPs offer a direct way to invest in specific companies, bypassing traditional brokers, and can be appealing for certain investors.
How to Trade After Obtaining a Broker
Once you've settled on a brokerage platform, the next step is to set up and fund your account to begin trading. This process has become increasingly streamlined, with the convenience of online banking making it easy to link your bank account and transfer funds swiftly. You can also opt for recurring deposits to steadily grow your investment portfolio.
Once your account is funded, initiating a trade is a straightforward process. Whether through the broker's online platform or a phone call, you can place your trade. Stocks are identified by unique ticker symbols, typically one to four letters representing a specific company. For example, "MSFT" stands for Microsoft Inc., and "AAPL" for Apple Inc. If you're unsure of a stock's ticker symbol, it's easy to find online or through your broker's resources.
When you select the stock you wish to trade, you'll encounter a price quote displaying vital information about its price and activity. This includes the last traded price, along with bid and offer prices. The bid represents the highest price a buyer is willing to pay, while the offer is the lowest price a seller is willing to accept. The difference between these prices is known as the spread, with a narrower spread indicating active and liquid market conditions.
After reviewing the price quote, you can proceed to place your order. Market orders are the simplest type, providing immediate execution at the prevailing market price. Alternatively, limit orders allow you to specify a price at which you wish to buy or sell. If the price doesn't reach your specified limit, the trade remains active until canceled. You can also set additional conditions on your order, such as specifying it as a day order, good 'til canceled, or including stop-loss provisions.
Once your trade is executed, you'll receive a fill—a summary detailing the specifics of your order.
Conclusion
By opening a brokerage account with one of the many brokerage firms, you can purchase or sell stocks on your own. Once your account has been opened, link it to your bank checking account to make deposits that you can subsequently use for investments.
Don't confuse convenience of account opening with ease of making wise investing choices, though. It is generally advised that novices consult with a licensed financial counselor.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.
