I’ve written to you in the past about where the market is moving, which sectors will dominate the future, and which stocks you should look at buying right now…
While overlooking one very important point…
You could be new to buying stocks and not certain how to do it.
Indeed, a number of readers have written to me over the past several weeks to ask for some practical advice on how to get started investing in the markets.
Today, therefore, I’d like to provide you with this 101 guide to buying your first stock.
Step 1—Two Types Of Brokers And One Alternative
When people think about stock brokers, they typically imagine a slick-looking guy in a suit shouting orders on the trading floor.
That’s all in the past. Today, computers do the trading.
But this doesn’t mean you can’t talk to an actual person anymore. Full-service brokers still exist… and they look just as slick as they did in the 1990s.
Their job is to get to know you personally and financially. Specifically, they’re interested in what your level of risk tolerance is, your age (time horizon), your investable wealth, etc. Full-service brokers need to learn as much about you as they can so they can make the right recommendations for your portfolio.
Often, their services extend to other investment agendas beyond the stock market, including retirement planning, tax advice, or estate planning. Hence, the name “full-service.”
They are also the most expensive option. Though minimum deposits can be as low as US$1,000, the transaction fee for a full-service broker is around US$150 per trade. If you’re buying US$1,000 worth of stock, that means you’re paying 15% in commissions.
A cheaper option, and the one preferred by most investors, are online/discount brokers.
But this doesn’t mean you can’t talk to an actual person anymore. Full-service brokers still exist… and they look just as slick as they did in the 1990s.
Their job is to get to know you personally and financially. Specifically, they’re interested in what your level of risk tolerance is, your age (time horizon), your investable wealth, etc. Full-service brokers need to learn as much about you as they can so they can make the right recommendations for your portfolio.
Often, their services extend to other investment agendas beyond the stock market, including retirement planning, tax advice, or estate planning. Hence, the name “full-service.”
They are also the most expensive option. Though minimum deposits can be as low as US$1,000, the transaction fee for a full-service broker is around US$150 per trade. If you’re buying US$1,000 worth of stock, that means you’re paying 15% in commissions.
A cheaper option, and the one preferred by most investors, are online/discount brokers.
These are essentially order-takers. They leave it up to you to decide what to invest in, when to buy, how to manage your portfolio, etc.
However, while these might not give personal advice, they still can offer plenty in terms of research, market reports, and investment education.
Most important, their fees are a fraction of those charged by a full-service broker.
All the trades are entered by you, online, with no help from a certified advisor.
Transaction fees are flat and range from US$5 to US$30 per trade, depending on the broker.
There is another alternative if you want to avoid brokers, full-service, or discount.
You could also purchase shares through a Direct Stock Purchase Plan (DSPP). Some companies occasionally sponsor these to attract small investors.
Each DSPP is different, so you should turn to the company’s investor relations department for more information on how to participate.
Step 2—Ask Yourself These Three Questions When Choosing A Discount Broker
I always recommend making trades yourself through an online/discount broker.
It’s OK to seek professional advice, but if you can get a discount to enter the trades yourself, you should. Just think how much you will save in exchange for a few extra minutes of your time.
When choosing an online broker, ask yourself three questions.
Question #1 to ask yourself when choosing an online broker is: How much do you plan to trade?
A broker may have low trading commissions but may also charge inactivity fees. That kind of broker is best suited to an active trader.
Question #2 to ask yourself when choosing an online broker is: How much do you plan to invest?
Moreover, some discount brokers allow you to open an account without a minimum deposit. Otherwise, they require US$10,000. But all work with tiered systems, whereby they offer better discounts to investors with the highest deposits on account.
Question #3 to ask yourself when choosing an online broker is: How much support would you like to have?
Finally, online brokers vary in the type and quality of support they offer. Are you OK with a chatbot addressing your issues or would you prefer a real person handling your case? Also, consider the type of investment research, market report, and educational tools on offer.
After you’ve answered these three questions, then you’re ready to choose your broker. Here are some of the best options available:
TD Ameritrade
Stock trade fee (flat): $6.95
Minimum deposit: $0.00
Best for: Beginner investors
Pros: Research quality
Cons: Slightly more expensive than others
Charles Schwab
Stock trade fee (flat): $4.95
Minimum deposit: $0.00
Best for: Beginner investors
Pros: Research quality
Cons: No forex trading
Interactive Brokers
Stock trade fee (average): $1.00
Minimum deposit: $0.00
Best for: Active traders, advanced trading, options
Pros: Low trading fees
Cons: Inactivity fee
Robinhood
Stock trade fee (flat): $0.00
Minimum deposit: $0.00
Best for: Mobile users, high-yield savings, margin accounts
Pros: Zero commissions
Cons: Limited number of stocks
Good Investing,
Leon Wilfan
