So, you've pointed your computer toward information on investing. Good for you! This is a great way to learn more about how to make money and find promising investment ideas. But are you trading online yet? Many people are already, and if you're not one of them, you might want to consider joining the club. According to a recent Washington Post article, "More than 10 million people have bought or sold investments online in the United States in the last few months."
Here's a quick rundown of how to go about trading stocks online -- something worth doing if you're interested in building a nest egg that will serve you well in retirement. (Consider taking advantage of a free trial of our retirement newsletter.)
Compare brokers and choose one
Before you start doing business with a brokerage, you'll need to choose one. Click over to our Broker Center for lots of tips on how to evaluate brokerages and select one that best suits your needs. We also offer a handy comparison table, featuring several brokerages that support your friend, the Fool. (Did you know that some brokerages charge less than $5 per trade?)
A few initial pointers:
- Don't focus just on the commissions charged per trade. Yes, a brokerage that charges $10 per trade looks better than one that charges $12, but there are other considerations. If the first one charges inactivity (or "maintenance") fees of $100 per year and you don't plan to trade much, you may be better off with the second brokerage. The more often you plan to trade, the more important the commission cost should be. For those who trade a few times a year, even a $20 commission isn't the end of the world.
- Look at other features, such as whether brick-and-mortar branches are available locally, if that's appealing to you. See if the brokerage offers check writing, if you'd like that. If you want to invest in certain mutual funds, see whether the brokerage offers those funds.
As you shop around, call or write the main contenders and ask for more information. You might request a sample statement to see how clearly they'll be updating you on your holdings' performance.
Fund your account
Once you've settled on a brokerage, get the forms you'll need to open an account. The brokerage may have them mailed to you. You may also be able to download them from the company website.
Decide what kind of account you're opening. A regular, traditional account is one where you invest your post-tax money. It's not designated as a special retirement account. Most brokerages permit you to open tax-advantaged retirement accounts, too, and have forms (or boxes to check) for that. Retirement accounts include traditional IRAs, Roth IRAs, and the like. (Learn more about IRAs.)
Once you fill out the application form, you'll probably just mail it in, along with a check. (Note that most brokerages have minimum investment amounts, which are often lower for IRA accounts. Common minimums are $500, $1,000, $2,000, and more. Some brokerages have no minimums at all.)
After you send in your money, you'll usually get a package of documents with your new account number and instructions on how to go about trading online. You'll probably need, for example, to set up a password for your online account.
You're still not quite ready to invest, though. There's an important stone still unturned: you need to select some stocks!
There are thousands of publicly traded companies out there you can choose from. Some will do spectacularly well for their shareholders, and others will bleed shareholders dry. You need to take your deliberation seriously and choose carefully. If you're just starting out, consider a simple S&P 500 index fund, which will immediately have you invested in 500 of America's biggest companies, such as Boeing
When you're ready to place an order to buy or sell some stock, you have a few choices. You can, for example, place a "market" order, to trade at the best available price as soon as possible, or a "limit" order, to trade only at a certain (or better) price.
This article explains more about these two main kinds of orders, as well as a few more options you have.
Manage your portfolio
Last but not least is the issue of managing your portfolio, because you don't want to just buy stocks and then forget about them, right? One critical way to manage your portfolio is to keep up with your holdings regularly -- at least once a quarter. Read their earnings reports and annual reports, look up news stories, check in on their Fool discussion boards, etc.
Try not to hold stock in too few companies or your eggs will be spread out into too few baskets. But if you have too many companies, you won't be able to keep up with them. If any holding starts underperforming, look into the reasons why. Selling might be in order if there's a long-term problem, but many problems are short-term and fixable. Think of Johnson & Johnson and its Tylenol tampering scandal of yesteryear.
Here are a bunch of other reasons to sell a stock.
You may be ready to start trading right now, but don't do so without first getting a good grounding in how to invest prudently. Don't invest all your money before you really know what you're doing. Start slow and small, perhaps buying some shares of this or that, just to get your feet wet while you keep learning.
Here are some additional Fool articles on brokerages:
- Kiss Your Brokerage Goodbye
- The Best Brokerages for Funds
- Brokerage Questions for Beginners
- Finding the Best Brokerage
Johnson & Johnson is an Income Investor recommendation.
Selena Maranjian's favorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. She owns shares of Johnson & Johnson. For more about Selena, view her bio and her profile. The Motley Fool is Fools writing for Fools.