The first question that novice investors ask is usually: How do I buy stocks online? This is a relatively straight forward process once you have gathered all the information that you need.
There are two ways you can invest in stocks. The first way is to buy stocks directly through either a stock purchase plan or a dividend reinvestment plan (see How to Buy Stocks Without a Broker). The second way is to open an account with a brokerage firm, then you can buy and sell stocks online.
How To Buy Stocks Online: Choosing a Broker
Choosing a brokerage firm is perhaps the most difficult and important decision you will have to make when it comes to online investing. You should take your time and not rush into choosing a broker. To assist in this process, ask yourself these questions:
- How much money do you have to invest? Some brokerages set commissions based on the amount of capital in your investment or related account(s). If you are a small investor, you may wish to avoid such brokers because commissions will be high relative to returns. Instead, consider brokers such as folioinvesting.com which allows unlimited (window) trades for a fixed monthly fee, or interactivebrokers.com with commissions as low as $1 per trade.
- Are you an investor or a trader? If you are an investor, then you perform your researchin advance then buy the chosen stocks online with the intention of holding them for a long period of time. Some brokers provide research tool and reports to assist in this effort. If you are a trader, then you will likely need real-time analytical tools such as intraday stock charts and technical analysis indicators for timing entry and exit. Some brokers provide excellent tools for this purpose.
- What type of brokers orders will you require? Some brokers allow only basic order types such as market, stop and limit orders, while others, such as interactivebrokers.com, allow very sophisticated order types and algorithms.
- What base currency (or currencies) do you need? For example, if you live in Canada and want to trade US stocks, you may want to have a US Dollar account to hold US stocks in. Otherwise you will be converting between currencies when you buy and sell stocks. This can be expensive, messy paper trail or both.
- Do you need a registered account? Not all brokerage firms provide registered retirement savings plans or other such tax sheltered accounts.
- How much hand-holding do you need? Novice investors should plan on talking to their brokers over the telephone on occasion. Before deciding on a broker, talk to them and be assured that you can reach them on the phone, feel comfortable with them and place orders over the phone if necessary.
- Will you need a margin account? There are 2 main types of account: cash and margin. Aggressive investors will want a margin account so that money can be borrowed for investments. A margin account is also necessary if you wish to short stocks or hold certain types of option strategies.
How To Buy Stocks Online: Opening an Investment Account
Once you have decided on a brokerage, you will have to fill out an account opening form or an investor profile form (also known as “know your client” information). Your investor profile helps your adviser understand your goals and your tolerance for risk. If you are planning on opening a margin account, then you will be asked to provide information to establish your credit and there is a chance the application will be disproved.
The exact process may vary from one broker to another but essentially you will be required to mail or FAX in your application along with a certified cheque. When the application is approved and the cheque clears, an online account will be opened for you.
How To Buy Stocks Online: Buying and Selling Stocks
When you want to place an order, you will need to sign into your online account and have the following information ready:
- The stock symbol for the stock you want to buy or sell.
- How much of the stock you want to buy or sell.
- The price you are willing to pay.
- The order type. The two most common are market orders and limit orders.
- The expiry date for the order, either end of day or a specific date.
Once the information above is put into the appropriate fields then the order is sent to the broker for processing.
How To Buy Stocks Online: Confirm Execution of the Order
Always check back to make sure your order has been filled and the price it was filled at. If it was a market order then it should be filled relatively quickly if the markets are open. If it is another order type then check back regularly to see if the order was filled.
How To Buy Stocks Online: Bad Fills
On rare occasions, you may find that the fill price is significantly different from what you had anticipated, based on intraday stock pricing. In such cases, you should contact the broker by telephone within 24 hours. They are obliged to investigate and provide an explanation for the filled price.