How to Buy Stocks Online
This is a step by step guide on how to trade stocks online for beginners. You will learn everything you needed to know to start trading or investing online.
Choosing a Stock Broker
First thing first, to be able to buy stocks online, one needs to have an account with a stock broker.
There's never been a better time than now to buy stocks online. Nowadays, you can trade stocks with $0 commission from major online stock brokers. Not long ago, you need to pay a transaction fee anywhere from $5-$7 just to buy a stock, and then another $5-$7 to sell your stock. For frequent traders especially those with small accounts, the cost can add up quickly and eating up your profits or piling up on top of your losses.
Inspired by Robinhood which was a pioneer broker in commission-free investing, leading stock brokers such as TD Ameritrade and Fidelity have made their trading platform free of charge since 2019.
We've done the research and find the top 5 online stock brokers that you can trust. Visit the best stock brokers to find out who they are. In a nutshell, here are a few things that you need to considered in choosing the right stock broker for you.
Commission - Some stock brokers still charges a commission for trading. If you want to trade for free, make sure your broker offers $0 commission trades for stocks, options and ETFs. If you are planning to trade penny stocks, make sure you check the restrictions.
Some stock brokers like TD Ameritrade charges a $6.95 fee for trading penny stocks listed on the OTCBB market even though it is commission free when you trade stocks from the regular exchanges such as the NASDAQ and NYSE.
Trading Platform - Other than commission, trading platform is another major consideration in choose a stock broker. A good stock broker is able to execute and fulfill your trades easily and quickly from their platform.
Research Platform - If you are new to trading, it is important to find a stock broker that offers extensive resources and market research that can help you make better investing decisions. Some stock brokers offer real time stock screening to find stocks based on your investing strategy or analyst ratings.
Account Minimum - Many stock brokers requires a $0 account minimum to open an account while others do require a minimum deposit.
Investment Types - Make sure the broker that you choose supports the type of investment that you are trying to invest, such as stocks, options, ETFs, forex, or the international markets.
Retirement Accounts - If you are planning to invest from your IRA, Roth IRA, or other retirement accounts, make sure the broker has everything you need to get started and check if there is any fees associated with it.
Charting Platform - If you plan to day trade or do any kind of short term trading which relies heavily on the studies of technical analysis and chart patterns, find a broker with an advanced charting system so you can perform your stock analysis.
After you choose a stock broker, the actual buy and sell a stock process is easy. Here's a screen shot on how you buy or sell a stock through TD Ameritrade.
Types Of Orders
There are mainly three types of orders that you can execute a trade, market orders, limit orders, and stop loss orders and buy stop orders.
Market Orders - Market orders are to buy or sell a stock immediately. A market order is usually execute at or near the current bid when you sell a stock, or near the ask price when you buy a stock. When you are trading with highly liquidity stocks, that will almost always be the case.
However, if a stock has low volume, the price you see might not be the price you get, there could be big price differences. For example, you see a penny stock trading at $1.50 with low volume, then you buy the stock with market order, the price you actually paid for each share could be $1.70. That's a 13% difference, therefore you should always use a limit order to trade low volume stocks.
Limit Order - is an order to buy or sell a stock at a specific price or better. For example, when you set a limit order to buy a stock at $20, the trade will only be executed if the stock drops to $20 or lower. On the hand, if you want to sell a stock at $20, the trade will only be executed if the price is $20 or higher.
Stop Loss Order - is an order to buy or sell a stock at a specific price to protect a trader from further losses. For example, you buy a stock at $20, and you want to sell the stock if it drops to $18. You will set a stop loss order to sell the stock, and when your stock drops to $18, the stop loss order becomes a market order and your stocks are sold.
For beginners, these are the three core types of orders that you need to be aware of. Once you learn more about the market, you can take advantage of the different types of limit and stop orders such as buy limit, sell limit, buy stop and sell stop.
How to Select Stocks
Choosing a stock broker, executing trades are the easy part of the equation in stock trading and investing online. The hard part is how to select stocks so that you can make profit.
There are three types of stock market participants, traders, investors and speculators.
Long Term Investing
Investors are the ones who buy a stock based on company fundamentals. They study fundamental analysis to increase the odds of choosing a winning stock. They buy a stock based on a company's product, leadership, market position, growth rate, competitive advantage, and the company potentials.
Through the study of fundamental analysis, and by reading a company's income statement and balance sheet, they determine whether or not a company is worth investing.
There are two types of investor, growth and value investors.
Growth investors buy companies based on their growth. They are more concern about a company's year to year and quarter to quarter revenue growth and sales increase. They often neglect or care less about the company's current profit or net income increase rate.
For instance, Amazon became a 100 billion company long before it achieved a single dollar profit. Amazon investors bought the stock based on the revenue growth and it's potential and they are well paid off.
Value investors are looking for bargains or finding companies that are trading at a historical low price. They use financial matrices such as price to earnings (P/E) ratio, debt to equity (D/E) ratio, price to book (P/B) ratio, free cash flow (FCF), and PEG ratio to determine if a stock is cheap and trading at a bargain.
Usually, investors hold their stocks for the long term, often more than a year and sometimes much longer. The best known investor of all time, Warren Buffett is a value investor and he is known for holding stocks for decades.
Short Term Trading
Traders are those who buy and sell stocks based on technical analysis and stock chart patterns. They buy stocks when the technical indicators signal them to buy and sell stocks when the indicators are telling them to do so.
Usually, the holding period of a stock for traders is very short, anywhere from a few seconds to a few months.
Most traders don't care about company fundamentals. They don't read income statements nor balance sheet. They don't study financial ratios like P/E ratio or the P/B ratio.
Instead, traders focus on the studies of trading systems, psychology, chart patterns, and technical indicators. They believed history repeats itself. What happens in the past on a stock chart will repeat again in the future. If a certain stock pattern was profitable on one stock, it may be profitable for another.
Speculators are the third group who participated in the stock market. They usually trade or invest based on tips from gurus, family members or friends, and sometimes on news. Some may even do a little study of the market, but nothing extensive and trick themselves into believing that they can beat the market. These speculators have no trading system or a plan whenever they buy or sell a stock. Most speculators lose most or all of their money that they put into the market, never learned a lesson and have no idea why they lost their money. Needless to say, you don't want to be one of the speculators.
Recommended Books on Trading and Investing
Many investors and traders use both fundamental analysis and technical analysis to get the best of two worlds. There are investors who incorporate technical analysis into their investing style to find entry points, and then there are traders who use fundamental analysis to narrow a list of stocks that they trade with.
The Intelligent Investor is a classic book in value investing, and Warren Buffett attribute his success to this book.
To get started on technical analysis, read Technical Analysis of the Financial Markets.
Following are two lists of books that every beginner should read.
- Best Stock Market Books of All Time - list of the best stock market books ever written ranging from investing, to trading and psychology.
- Best Swing Trading Books - list of the best trading books for short term traders who are planning to swing trade the market.