Online Stock Trading 101: A Beginner's Guide
Learn the Ropes if You're a Newbie to Online Trading
Want to invest in the stock market? Start by learning the basics so you feel confident as you begin to trade.
This beginner's guide to online stock trading will give you a starting point and walk you through the basics so you can feel confident choosing stocks, picking a brokerage, placing a trade, and more.
How to Choose an Online Broker
First, you need to open a brokerage account with an online stock brokerage.
Take your time researching the reputation, fees, and reviews for different options. You want to feel sure that you are choosing the best online stock broker for your situation.
As you research, look at trading commission fees (many will offer free trading), how easy the app or website is to use, and whether it provides any research or learning tools for users.
Big firms like Fidelity, Vanguard, and Charles Schwab have both online and app-based trading tools. They have been around for years, have low fees, and are well known.
There are also new platforms that specialize in small trades and easy-to-use apps, such as Robinhood, WeBull, and SoFi. Which style and size of brokerage is best will depend on you.
Why to Research Stocks
Once you have a brokerage, you can buy stocks. However, choosing them can feel tricky.
If you're brand new to trading, stocks may not be the best place to start. You may want to try exchange-traded funds (ETFs) instead.
ETFs allow investors to buy a bundle of stocks at once. This can help if you don't feel confident choosing one company over another.
ETFs built to replicate major stock market indices like the Dow, Nasdaq, and S&P 500 are good places to start. They give your portfolio broad exposure to the U.S. stock market.
Many traders also diversify, or add variety to, their portfolio by investing in assets other than stocks. Bonds are a popular way to diversify and create less risk to your investments during stock market downturns.
Selecting individual stocks is difficult. To choose well, use financial analysis ratios to compare a company's performance to its competitors. This can help ensure that you're adding the best stocks to your portfolio.
What Kind of Trade Is Right for You?
Market orders process, or "execute," immediately. The asset you are trading goes for the best price available at that moment.
Limit orders are a way of having greater control over the price you pay (or receive, when selling). They won't necessarily execute right away.
Instead, you set a price at which you will buy or sell a certain asset. This gives you greater control to get the most profit possible.
Once you own a stock, you might consider placing a trailing stop-loss sell order. This allows you to retain the stock as long as the price is going up and automatically sell when the price drops past a certain point.
No order type is necessarily better than another. By learning as many of them as possible, you can always have the right tool for your situation.
What Will It Cost to Trade Stocks?
One obstacle to successful stock trading is expenses. This is money you pay just to own or trade securities.
For example, one type of expense is a commission fee. You should look for low fees when choosing a brokerage.
If you buy individual stocks through a brokerage that doesn't charge commission fees, you might not have any expenses. However, when you start trading ETFs, mutual funds, and other investments, then you need to understand expense ratios.
These funds are managed by a person who is paid a percentage of the fund's assets every year. So, if an ETF has an expense ratio of 0.1%, that means that you will pay $0.10 per year in expenses for every $100 you invest.
You also need to consider your risk tolerance. Imagine your investments suddenly losing 50% of their value. Would you buy more after the crash, do nothing, or sell?
If you would buy more, you have aggressive risk tolerance. You can afford to take more risks.
If you would sell, you have conservative risk tolerance. You should seek out relatively safe investments.
Understanding how you would react to losses is one thing, and understanding how much you can afford to lose is another.
For example, you may have an aggressive risk tolerance but no emergency fund to fall back on if you suddenly lose your job. In that case, you shouldn't use your limited funds to invest in risky stocks.
How Does Trading Stocks Affects Your Tax Bill?
It's important to understand the tax rules for your investments, especially if you're going to actively trade stocks. The taxes you pay on stock profits are known as "capital gains taxes."
In general, you pay more capital gains taxes when you hold a stock for less than a year before selling. You pay less when you hold a stock for more than a year.
This tax structure is designed to encourage long-term investing.
Selling stocks for a profit will increase your tax bill. But selling stocks for a loss will decrease your tax bill. To prevent you from taking advantage of this tax benefit, there's something known as the "wash sale rule," which delays the tax implications of any profits or losses if you re-enter the same position within 30 days. In other words, if you sell a stock for a loss, then buy the same stock a week later, your loss will no longer give you tax benefits.
The loss will be accounted for once you sell the stock again.
How to Trade Your First Stock
When you're ready to place your first trade, fund your brokerage account by transferring money to it from a bank account.
It may take time for your funds to "settle," or become available. Some brokerages give you the money immediately while the transfer is processing, and others wait a certain number of says.
Once the funds have settled, log into your online account with your brokerage. Select the stock you want to trade, pick an order type, and place the order.
After placing the order, watch to make sure it executes. If you're using market orders, it should execute immediately.
If you're using limit orders, your order might not execute right away. If you want the trade to happen more quickly, move your limit price closer to the ask price (if you're buying) or the bid price (if you're selling).
Are You Ready for Advanced Stock Trading Strategies?
Beginners should stick with simple buy and sell trades. However, once you master those basic concepts, you can add advanced strategies to your trader's toolbelt.
For example, trading options exposes you to greater volatility. These are riskier moves, allowing you to make both gains and losses more quickly.
Another advanced strategy is borrowing money from your brokerage firm to trade stocks. This is known as "trading on margin."
Trading on margin allows you to exponentially grow your portfolio, but it can also quickly land you in debt. This approach to trading stocks is very risky. You should avoid it until you feel confident in your trading abilities.
Margin traders also have the ability to short stocks. If you short stock, you sell the stock first and then buy it later.
When the price of the shorted stock falls, you can buy it back at a cheaper price than you sold it for. This allows you to make a profit. But if the stock price increases, you still have to buy the stock to close their position, and you will lose money.
What Are Alternatives to Trading Stocks?
Trading stocks is one way to engage in the market. But there are other options you can try.
Mutual funds, for example, don't trade like stocks or ETFs. Instead, they allow you to invest in many different sections of the market through a single fund.
You can also use a robo adviser instead of trading on your own through a brokerage. Robo advisers are app-based investment services. They use algorithms, and the answers to basic questions to automate investment decisions.
These are popular with beginners because they're easy to understand. They also have relatively low fees, compared to having a traditional financial adviser pick and choose investments for you.