You’ve experimented with mutual funds successfully. Now you’re ready to use your brain and cautiously absorb more risk, in hopes of a better return on investment (ROI). You see companies on TV and on the Internet advertising cheap stock trades. But it’s difficult to understand the choices and know what’s best for you. How do you get started buying stocks?
Stock brokers are trained and licensed to provide advice and to expedite stock trades for you. You can find them at your bank, and in brokerage firms such as Edward Jones or Raymond James. Some brokerage firms are even located within your bank. It’s essential to ask someone you trust to suggest a reputable broker. Stock brokers charge for their services in two ways. Some are fee-based, charging you for time and amount of service provided. Others charge a commission; be wary of them as they may be tempted to make frequent trades, thus charging you many commissions. Know the difference between fee-based and commission. A competent stock broker will happily perform a free portfolio review without obligation to you. Once you’ve chosen a broker, you’ll need to transfer money to open a brokerage account. It’s like opening a bank account.
Discount brokerages charge less than stock brokers for stock trades and function mostly with a toll-free number and website. Face-to-face service, though not essential, can be obtained if you live near one of their offices. For the do-it-yourselfer willing to do their own stock research, this may be exactly what you need for trading stocks. If stock brokers are like shoe stores where you get fitted for the proper shoe, then discount brokerages are more like buying shoes at Target. The service component is minimal, but often adequate. Discount brokerages such as Fidelity, Vanguard and Charles Schwab have their own investment projects plus online services to expedite stock transactions. TD Ameritrade, E-Trade, and Scottrade generally charge even less for trades.
Ask people you know about recommendations for the right discount brokerage service. There are a few things you should look for in a service. Be sure you can set-up limit orders which automatically sell a stock at a certain high point that you specify, and also stop-loss orders which enable you to sell at a specific low point. By having these types of orders in place, you do not have to “babysit” your stock. You also want the ability to set up a DRIP (Dividend Reinvestment Plan) if you desire. Once you select a discount brokerage service that sounds right for you, as with a stock broker, you‘ll transfer money to open a brokerage account.
Direct stock purchase (DSP) is exactly what it sounds like; you purchase shares of stock directly from the company. Not all publicly traded corporations allow this. To do a DSP, you will need to call the company you are interested in or get on their website and see if this is an option for you.
It may be best to say “no thanks” to these. Here are some tempting, but maybe not financially sound, opportunities that you should know about, even if it is just so you can say, “nope, not for me.”
You think of yourself as “active” so being an active trader sounds like it could be for you. Another term for active trader is day trader. You sometimes hear about a person who made oodles of dollars by sitting at a computer all day and buying and selling stocks. These people are rare and can often exaggerate the extent of their gains. Day trading is very risky and time consuming. Many of the discount brokerage firms aggressively market this service because each time day traders buy and sell, a commission is charged.
Trading foreign currencies may fall into this category of “cool idea, but not for me.” Special companies that only transact currency trades, such as Forex, insist that there is money to be made, and possibly there is, but you really have to know what you’re doing, and most people are simply not that knowledgeable.
The idea of giving shares of stock as a gift is commendable and creative. There are some companies that will sell you as few as one share of a company stock. It’s very thoughtful, but not much of a deal. It’s likely that you’ll spend much more in the fees than in the stock itself, considering that companies such as General Motors (GM) are selling for approximately $4.50 right now. For approximately $92 you can buy one share with a framed, engraved, certificate. A bit overpriced.
Investing in the stock market can be fun and lucrative, but choosing the right broker can make the difference between financial success and failure for you. Be thorough and do your homework when choosing the right broker and you will likely be happy with your decision.
Ready to start investing? Play the YOUNG MONEY Stock Market Game.