Online Shares Trading - A Primer

Whether you are an experienced investor who has always purchased investments through traditional channels (ie a stock broker) and want to take a more hands on approach to your finances, or a young person looking to open your first investment account for retirement purposes then learning how to buy stocks online is crucial as we move further into the digital age. This primer on online shares trading is intended to help those who wish to have complete control over their investments without having to worry about someone else making costly mistakes, or making decisions that are in conflict with your investment philosophies.

With apologies to the experienced in the crowd I am going to write this primer for the beginner, so as not to confuse those new to the world of personal finance.

Before you go to the trouble of opening up an online trading account with a brokerage house your first step should be to sit down and define your investment goals. If you are 20 years old and want to start saving for your eventual retirement your investment philosophy, your risk tolerance and your asset allocation is going to be much different from someone 60 years of age, who is looking for income in their retirement years. Every portfolio should have a balance of equities and fixed income. The longer your investment horizon the higher the percentage of equities you should have for maximum returns. However, even if your investment horizon is 40+ years you shouldn't be 100% in equities. A diversified portfolio will show you the best returns over the long run without the worry that you will be wiped out in the event of a stock market meltdown.

Before you can get into online shares trading you need to have an account with an online brokerage house. There are a multitude of options to choose from and narrowing down the task can be a little daunting. Some are standalone institutions, while others will be under the umbrella of a large bank. If the financial institution you normally bank with has a brokerage house this can be the most convenient option. Being able to pull up all your accounts on one screen and transfer money back and forth between them help makes the process of buying and selling stocks online as painless as possible. However, there is often a premium for this convenience. Large brokerage houses attached to banks will often have higher transaction fees than the dedicated standalone online brokers. This isn't a hard and fast rule of course, but seems to be the trend.

On the subject of trading fees (or commissions), your investment goals will play a large part in determining what kind of impact these fees will have on your bottom line. If you plan to buy 1000 shares in a stable company and hold them for 40+ years then a $29 commission on the purchase and again on the sale is going to be a drop in the bucket. However, if you plan to trade actively, buying and selling small lots of stocks on a weekly or even a daily basis then a brokerage house that offers $4.95 trades is going to fit your profile a whole lot better.

The best way to make your choice is to make a list of contenders and write down the pros and cons of each one. Compare fees, customer service, included software and stock market analysis tools, and flexibility. Don't forget to research the stability of the institution. There is something to be said for having the added peace of mind of having your money with an institution that has been in business and making money for a long time. There are no guarantees in life, but pouring money into a company that just hung out its shingle 3 months ago just to save a dollar on trades likely isn't worth the added worry.

Once you've chosen your brokerage and have got your account set up you are ready to execute your first purchase. Again, this should be in line with your investment goals, time horizon, risk profile and your chosen asset allocation. Thoroughly research the company whose shares you intend to buy, including their past performance and their expectations for the growth of their business over the years to come. Your online broker may have tools or software available on their website to aid you with this analysis and make sure you get the most accurate, up-to-date information possible. Ideally for your first trade you'll want to choose a stable company that has a proven track record of consistently growing their business over years, or better yet decades.

Once you've decided which stock or stocks to buy you will want to check the current price of the company's shares. Again, with your account you should have access to a limited number of real time quotes. Most stock quote information you see online is delayed by 15 or 20 minutes, and having access to up to the second data can potentially save you a bundle if you are buying a large number of shares. The price will indicate the cost per unit of the last group of shares of the company that was purchased. You will see a bid and an ask price as well. On a high volume stock there will be very little spread between these numbers.

At this point you have the choice of placing a market order, or entering your own bid. If you choose to purchase at market price you will be paying the ask price. If the difference is 5 cents on a hundred dollar stock then this is negligible. Providing there is plenty of volume a market order will go through within seconds of you hitting the buy button and before you know it you'll own shares in your chosen company! If you choose to bid instead you'll have to wait until your order is filled by someone willing to sell to you at the price you've set. If the price goes up from the time you place the order then odds are low that your order will get filled, and you'll have to adjust your bid if you still want to purchase.

In order to make things as seamless as possible try and purchase stocks in lots of 100 or multiples thereof. 37 shares is an odd lot, and you may have to pay a premium (even if you place a market order) to have your order filled.

Once you've completed your transaction you can continue to watch the price of your holdings in your brokerage account. If you only have access to a limited number of real time quotes each month then I recommend just checking the delayed quotes. Save the others for when you are actually planning to buy or sell.

It had be exhilarating watching your stocks go up, but be careful not to let your emotions rule you. Today's performance is no guarantee that tomorrow will be just as good or better. Don't get caught up in the game and go off chasing hot stocks in the hope of supercharging your returns. At that point you are just as well off at a craps table in Las Vegas. Always do your due diligence before making any online stock trade, keeping your investing profile firmly in sight. Remember, no matter how disciplined you are there is always an element of risk when you put money into the stock market. However, if you make a solid plan, stick to it over the long haul, and don't let your emotions change your mind midway through you have a great chance to build wealth for yourself. Good luck.