Stocks are investments in a company. Someone who owns a share of stock in a company has partial ownership of that company and its profits. Investing in a company means that you view the company as potentially, if not currently, profitable. Stock trading can be lucrative, so much so that some investors have set up entire retirement accounts funded by their stock earnings.
In this article, we’ll teach you how to get started trading on the stock market. Specifically, we’ll discuss the first step: choosing a stockbroker.
How can I get started trading stocks?
If you’re a beginner, it might be a little overwhelming to join the fast-paced world of trading stocks. It can certainly be risky to dive into stock trading without educating yourself on the basics. Luckily, good stockbrokers will offer tools to help educate and advise new traders.
What is Stock Trading?
Traders buy and sell shares of stocks. Traders want to capitalize on the stock’s daily price fluctuations, some of which can change minute-by-minute. A short-term trader bets that they can make a profit in the next minute or hour. A long-term trader buys stock in a blue-chip company (meaning one that is considered a reliable investment) and holds it for years, seeking to profit gradually over time.
Active vs. Day Trading
Active trading and day trading are the two types of stock trading to know. Active trading means that the investors conduct ten or more trades per month. Active traders rely on the timing of the market, taking advantage of market- or company-level short-term events to make a profit.
Day trading is conducted by investors who basically play “hot potato” with the market. They buy, sell, and close positions of the same stock within a single day. They care little about the inner workings of the company whose stock they’re trading, considering it more of a numbers’ game. Some brokerage firms have limited or banned day trading.
Opening a Brokerage Account
Selecting and opening your brokerage account is the first step to a successful trading career, and it is important to get it right. Stock trading requires you to fund a brokerage account, which is an account designed to hold investments. You can open this account in just a few minutes, but the process of selecting your broker should take much longer.
Do I need a stockbroker?
Direct access trading and trading through a stockbroker are two different things. Direct access trading lets investors trade with market makers and specialists. They don’t go through a broker. Direct access traders use specialized (legal) software that links them directly to the major ECNs—Electronic Communications Networks—and stock exchanges.
Though a broker isn’t strictly necessary, it is worth it. Brokers offer guidance, advice, and an established foundation. Some offer account management. It is difficult to trade stocks alone, especially if you are new to the industry. Technical difficulties and the complex nature of the stock market are two factors that necessitate a broker.
Everyone can benefit from having a stockbroker, even if just for the research, data, and analysis to help make decisions. Plus, you can choose the level of involvement you want, whether you want a hands-off broker or a personalized experience.
How do stockbrokers make money?
When you think of a stockbroker, you might think of Leonardo DiCaprio’s character in Wolf of Wall Street. However, that’s not really the case. Though some stockbrokers make a lot of money, it’s not a 100% money-maker. Additionally, stockbrokers who work on salary—as opposed to commission—tend to have a more stable income over time.
Stockbrokers make money by charging fees and commissions from investors. A broker helps you buy and sell investment tools, and they take a portion from the sales they make. Some brokerage firms don’t charge commissions and fees on certain investment products, and there has been a recent push from big firms like Fidelity and Charles Schwab to slash commissions and fees to the bone.
What should I look for when choosing a stockbroker?
In this section, we’ll discuss the main features of a good broker. This list is not exhaustive, but it contains five of the main features to look for: products, user experience, transparency, research and data, and customer service.
The quality and variety of products is important. How many stocks do they offer? The “Big Four” in America (Charles Schwab, E*Trade, Fidelity Investments, and TD Ameritrade) offer thousands upon thousands of stocks from which to choose.
For example, Charles Schwab offers stocks from over thirty-five countries, as well as any company on the S&P 500. Schwab also gives customers access to over sixty international stock markets. Though not all firms will have that high a level of variety, they should have an expansive selection.
This includes fees and commissions, platform functionality, and trade execution. These three sub-categories are the major components of user experience. Fees and commissions will take a bite out of your wallet if you’re not careful. In each broker review on our website, we list the fees and commissions that the broker charge for different products.
Secondly, platform functionality is essential to a smooth-running trading day. You don’t want to be annoyed with glitchy technology that prevents you from trading. A glitch-free system, be it a website, downloadable client, or an app, is a must-have. Thirdly, trade execution should also be glitch-free and run smoothly. Trading is fast-paced, and you don’t want technical issues slowing you down.
Transparency about pricing, regulation, and withdrawal and deposit time is a good indicator that the broker is honest. A broker who tries to hide vital information or staff identities from its customers is up to something shady, and you should avoid them at all costs.
Research & Data
A broker should offer market research and data to help you conduct trades. It is up to the broker to decide whether this research is self-generated or sourced from major publications. Research and data can make all the difference in your trading, as being an informed trader increases your chances of success in an already-volatile trading environment.
Customer service is also very important. You want responsive, fast customer support that won’t put you on hold for hours. You want issues resolved, at least within forty-eight hours, if no less, so that you can get back to trading.
What are questions I should ask when selecting a broker?
When deciding on a broker, you should ask two questions: does this broker give me my money’s worth? And, does this broker seem trustworthy? Reading reviews and conducting thorough research will help you determine if the broker answers those questions positively and meets the criteria listed in the sections above.