You can buy almost anything online these days, from the mundane — lightbulbs, diapers — to the downright weird. (Bacon-flavored dental floss, anyone?) Like adding items to your digital cart, buying stocks online is quite simple, actually.
The hard part is how to determine which stocks (and/or other securities) you’re going to buy for your brokerage account. Here are a few things to get you in the know so you can make smart online stock trades.
Why buy stocks online?
Online trading doesn’t cut down any of the risks of investing, but it’s often thought of as a cost-effective way to invest.
Instead of paying a hefty commission to a professional broker, online brokers can charge a much lower per-trade fee to invest in the stock market, reducing your out-of-pocket costs. With a few exceptions, these fees typically run between $5 and $10 per trade.
- Online trading is typically a more cost-effective way to build a portfolio than a full-service broker.
- You control which stocks you buy (or sell) and flexibility to buy and sell stocks when it’s convenient for you.
- Many online stock brokerages offer free tools that help you decide which stocks to buy.
Check out Ally Invest self-directed trading platform, standard fee to trade stocks, and exchange-traded funds (ETFs).
How do you choose your investments?
When you buy shares of a stock, you’re buying a piece of the company that issued it. If the stock’s value climbs, so does your investment’s. (Cha-ching!) Of course, if the stock’s value drops, you could lose money when you ultimately sell the stock.
Start with understanding the basics on how different stocks work. This can help you narrow down what you want to invest in.
For example, here are a few common types of stocks:
- Stocks that pay a dividend, which is an extra payment you get on top of the returns the stock is earning just for owning it. Dividends represent a percentage of the company’s profits and are paid monthly, quarterly or annually.
- Growth stocks, which means the share price is projected to grow at an above-average rate compared to other stocks.
- Value stocks, on the other hand, are considered to be undervalued, based on their potential to deliver solid returns to investors.
As you compare, get familiar with the ins and outs of stock pricing. When you pull up a stock quote, the first thing you’ll notice is that it includes several numbers:
- Closing price — the last price the stock traded at during a regular trading session
- Last trade price — represents the price at which the last trade occurred
- Bid — the highest price you can sell the stock
- Ask — the lowest price you can buy the stock
Knowing how these numbers work together can help you drill down a stock’s true price.
For example, assume you want to buy a stock. Its last trade was $84.77, but the closing price was $84.12. Meanwhile, the bid is $84.76 and the ask is $84.79. (Supply and demand creates this difference in price, which is known as the bid-ask spread.) How much would it cost you to purchase shares?
Since the ask refers to the price at which you can buy the stock, you’ll pay $84.79 per share.
You should also review a stock’s performance to see how the per share price has changed over time. Remember though, past history doesn’t guarantee future results. In other words, even though a stock has been a rock star performer doesn’t mean that it won’t go down in value at some point.
Also to be taken into consideration: how much money you’re comfortable losing if a stock drops in value (a.k.a. your risk tolerance). Investing in stocks is inherently risky, and some stocks have more risk than others. Having awareness of your risk tolerance and time horizon, which means when you’d ultimately want to take your investment out of the stock market, can help you decide which stocks are a good fit for your portfolio.
One way to potentially downplay risk is to invest in mutual funds and/or ETFs. Both contain stocks but also often include bonds, which are lower-risk securities. Having bonds in your portfolio can help balance out the risk associated with stocks.
Ready to buy your stocks online? Start trading today.
How do you open an online investment account?
The first step in buying stocks online is to choose a brokerage. Before selecting one, you’ll want to compare several things, starting with the range of investment choices.
Some might limit you to only buying stocks, but others might also offer mutual funds, ETFs, bonds, options, futures, and Forex.
Next, check the fees online brokers charge. Some brokers have higher trade fees than others and some brokerages charge one fee to buy stocks, but charge a different amount to invest in mutual funds, bonds, or options. And if your stock trade requires broker assistance, you might pay an additional fee for it.
Once you choose a broker, you can open your account. The amount of money you need to get started can vary from brokerage to brokerage. You can open an Ally Invest self-directed trading account with any amount of money, but you might need $1,000 or $2,000 to get started with other online platforms.
How do you buy the actual stocks online?
Hop on your device and navigate to your online account’s trading page. Plug in the stock’s ticker symbol and the number of shares you want to buy.
You’re getting close to buying your first stock online, but there’s a few more decisions to make.
For example, are you entering a market or limit order? A market order means you’re buying a stock at the current best market price. This is usually the fastest way to place your stock trade. And if you’re just getting started with investing and you plan to buy and hold your investments for the long-term, a market order could be fine for your needs.
If you’re trading a stock whose price is fluctuating rapidly though, market orders can get expensive. A limit order can reduce costs since it’s a way to lock in a stock price. You specify the price at which you want to buy (or sell) a stock, and the trade is only executed when it reaches that price.
A stop order is another option. It tells the market: If ABC stock trades at or through a certain price, trigger my order. You can enter a basic stop order that triggers a market order after your stop is reached, or you can enter a stop-limit order. In that case, the order is activated when your stop is reached, then is entered automatically as a limit order.
If you’re a beginning investor, stop orders can get a little complicated. You may want to stick with market or limit orders until you get into the swing of buying stocks online.
Once you’ve purchased your first stocks online, don’t just set your portfolio and forget it. Be the investor who reviews the stock holdings in your brokerage account regularly to make sure they still fit your needs and risk tolerance. Over time, you may need to buy new stocks or sell others to keep your portfolio on track with your short- and long-term investment goals.