Stocks are usually bought through a stockbroker since you can not just call a stock exchange and ask to buy them. Either through a human stockbroker or through an online platform, you can choose which asset to buy or sell and how to handle it.
Brokers can be divided into two broad categories: Full-service brokers or online/discount brokers. Here are some tips for trading stocks on your own with these options. Finally, we will go over direct stock purchase plans (DSPPs), through which investors can buy stock directly from specific public companies.
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Where to Buy Stocks
Stocks are mostly listed and traded on exchanges, which are licensed trading venues where buyers and sellers come together, usually with the help of a broker or other intermediary. These brokers are members of the exchange and use their access to buy and sell shares on your behalf. The New York Stock Exchange (NYSE) and Nasdaq are two of the major exchanges in the United States.
Alternative trading platforms, such as the OTC Pink Sheets, may be more suitable for smaller companies with less liquid stocks and minimal market capitalization (sometimes called penny stocks). Investing in the OTC market is riskier and more volatile, so investors should perform additional due diligence and understand the risks.
How To Buy Stocks With a Full-Service Broker
When people think of investing, they often picture well-dressed businessmen sitting in an office talking to clients. These are the traditional stockbrokers who are looking to learn about your personal and financial situation.
Marital status, lifestyle, personality, risk tolerance, age (time horizon), income, assets, and debts are all taken into consideration. These full-service brokers can help you create a long-term financial plan after learning as much as they can about you.
The term “full-service” describes brokers who can help you not only with your investment needs, but also with estate planning, tax advice, retirement planning, budgeting, and any other type of financial advice you may need – this is for investors who need a one-stop store.
A full-service broker has a higher fee structure than a discount broker, but a human investment advisor may be worth the extra cost. An account can currently be opened for $1,000 or less. Most beginners fall into this category when it comes to the type of broker they need.
How To Buy Stocks Online
On the other hand, online/discount brokers do not provide investment advice and are basically just order takers. Since there is usually no office to go to and no certified investment advisors, they are significantly less expensive than full-service brokers. Costs are usually charged per transaction, and most online accounts can be opened with little or no money down. Typically, you can buy and sell stocks immediately through an online broker’s website once you sign up and have access to your account.
Since these types of brokers do not offer investment advice, stock tips or support of any kind, you are responsible for managing your own investments. Support is usually limited to technical assistance. Investment-related links, research, and resources are available from online brokers (discount brokers). This is a good option if you have sufficient knowledge to manage your investments yourself, or if you are new to investing and want to learn on your own.
The bottom line is that you should choose your broker based on your specific needs. People who are willing to pay a premium to have someone else manage their finances will benefit from full-service brokers. Online/discount brokers, on the other hand, are great if you have little start-up capital and want to take the risks and rewards of investing into your own hands without professional help.
How To Buy Stocks Via a Direct Stock Purchase Plan
Corporations (often blue-chip companies) sometimes offer a special type of stock purchase plan (DSPP). DSPPs were originally designed as a way for smaller investors to purchase stock directly from the company. Participation in a DSPP requires the investor to work directly with the company rather than through a broker. However, each company has its own way of managing a DSPP.
DSPPs are offered by participating companies through transfer agents or other third parties. Investors interested in learning more about DSPPs should contact the company’s investor relations department.
How to Trade Your Stocks
For the most part, beginners should simply buy and sell their stocks at the prevailing price.
Before you actually make a transaction online, visit your broker’s website and click on the trading link. The site will ask you how many shares you wish to buy and whether you wish to make a market order or a limit order.
When you put in a market order to buy 50 shares of Acme Widget, the broker will make the buy at the best available price. If you’ve analyzed Acme Widget and like the stock at $40 per share, it shouldn’t matter much whether you buy at $39 or $41.
Limit orders, on the other hand, are for investors who want to buy or sell only if the share price reaches a specific level. For example, if you consider Acme too expensive at $40 but would buy it at $35, you can submit a limit order with a $35 price, and the broker will buy the shares if they dip to $35 or below. Limit orders provide greater control over the price paid for a stock, but they can keep investors out of a stock as well.
If Acme drops to $35.01, then rises to $50, the investor with the $35 limit order will never buy the stock—and never share in the gains.
Investors also use limit orders on the sell-side to lock in gains. Suppose Acme trades for $40 per share, but you’d like to sell and book your profits if the price rises to $45. A limit order to sell at $45 will get you out of the stock at a price no lower than $45, as long as the stock rises to the target level before the order expires. Brokers generally charge higher commissions on limit orders than on market orders.
Some investors prefer to use stop orders—orders that turn into market orders after the stock hits a threshold. For example, Acme trades at $40. You’re afraid it will fall hard, so you put in a stop order at $35. If the shares dip below $35, the stop order activates and your broker sells the stock at the prevailing price.
Unfortunately, stop orders have limits. If bad news breaks and the stock immediately dips to $30 per share, you’ll sell at about that price. A sell limit order won’t guarantee you a sale at $35, just that you’ll sell the shares at the going rate once the price dips below $35.
Investors who use stop orders also run the risk of buying or selling stocks simply because the market moves. Suppose you set a stop order at 10% below the stock’s current price to protect against ugly losses because you fear the company will lose a patent lawsuit that could cost it millions of dollars in sales.
What if the market falls 15% and your stock slides with the rest of them? No lawsuit has surfaced, and the reasons you purchased the stock remain intact. Yet the stop order would have sold you out of the stock, which presumably stands a good chance of recovering when the market regains its momentum.
In short, limit orders allow you to get into stocks if they fall or get out of stocks if they rise. Stop orders allow you to get out of stocks if they fall or get into stocks if they rise. Your broker will offer you plenty of trading options beyond the market, limit, and stop orders.
As you gain experience, feel free to expand your horizons and experiment with new ways to trade. But whatever you do, no matter your trading goals, never forget the single most important trading rule: If you don’t understand how the trade works and why it makes sense, don’t make the trade.
Come to think of it, that advice applies to most aspects of investing.
Learn more about how to pick the best stocks.
How To Read a Stock Quote
When you open up a financial website and type in your ticker, you’ll see a page with a bunch of numbers. While each site designs its pages differently, you can count on seeing most of this information:
Ask price: The lowest price a seller is willing to accept for a security. For most large, heavily traded stocks, the bid and ask prices will be close together. For thinly traded stocks, the bid-ask spread can get wide.
Bid price: The highest price a buyer is willing to pay for a security. At any given time, brokers deal with millions of buy and sell orders, some of which indicate a specific price to buy or sell.
Current price: This number reflects the most recent transaction price, though free websites usually operate on a delay, so their numbers are slightly outdated.
Day’s range: The high and low prices in the current day’s trading. Fifty-two-week range: The high and low prices over the last year.
Volume: The number of shares traded.
Last, note that if you access a quote page after the market closes, you’ll see end-of-day numbers. If you visit during trading hours, you’ll find intraday numbers.
How To Limit Your Taxes on Stock Trading
Only a fool makes investment decisions without considering the tax implications. On the flip side of that coin, only a fool allows tax concerns to become the chief driver of those same decisions. Far too many investors refuse to sell stocks at a profit because they don’t want to pay taxes on the gains. But when the situation changes and it no longer makes sense to hold the stock, failing to sell could cost them.
If you bought a stock many years ago and it has amassed huge gains, congratulations. After all, isn’t that the reason you bought it in the irst place? If you refuse to sell because you don’t want to share with Uncle Sam, you risk watching those gains evaporate. Sure, if you wait long enough, you might be able to sell at a loss and pay no taxes at all. But it’s still a loss. Who wins in that trade?
Fortunately, dealing with taxes on your investments is more irritating than it is difficult. With that in mind, here are three questions about taxes every investor must be able to answer.
Question: How much will I pay in taxes when I collect dividends or sell my stock?
Answer: Because Congress can change tax rates, this question has no permanent answer. But according to tax rates that took effect at the start of 2013:
- Most stock dividends and bond interest payments will be taxed at the taxpayer’s ordinary-income rate.
- Short-term capital gains (profits on the sale of stock or other securities) will be taxed at the ordinary income rate. If you sell an asset after holding it for one year or less, you owe taxes at the short-term rate.
- Long-term capital gains will be taxed at 0%, 15%, or 20%, depending on the investor’s income.
- Fortunately, you can still use capital losses on your investments to offset income. As always, you only accrue tax liability when you sell your shares. If you buy stock for $1,000 and it skyrockets to $10,000 in a year, as long as you hold onto it as stock, you don’t owe a dime of taxes on it.
Question: How can I protect my investments from tax liability?
Answer: Individual retirement accounts (IRAs) allow investors to defer taxes on investment proceeds. Some salesmen market IRAs as if only special companies can set them up, and then direct investors to companies that charge large fees to manage the accounts. But that’s not how IRAs work. You can set up an IRA at any brokerage, and you can invest in stocks, bonds, mutual funds, and most other financial assets within an IRA.
As of 2013, investors under age 50 can contribute a maximum of $5,500 to their IRA; contribution limits have risen over time, and this trend is likely to continue. In most cases, you can deduct contributions to an IRA from this year’s taxes. However, if you or a spouse contributes to another retirement plan through a job, you probably can’t. And you can only contribute to an IRA if you or your spouse earns taxable income.
Investors can start taking money out of their IRAs at age 591⁄2, and they must begin after they turn 701⁄2. IRA distributions are subject to federal income tax, and if you remove money from an IRA before the age of 591⁄2, you’ll owe federal income tax plus an additional 10% penalty.
A special kind of IRA—the Roth IRA—allows investors to grow their money tax-free. However, Roth IRAs require a few extra hurdles. You can’t deduct the contributions, and your income and tax-filing status may limit how much you can contribute.
Question: My job offers a 401(k) retirement plan. Should I sign up for it?
Answer: Almost certainly yes. As long as the plan provides you with investment options that don’t truly stink, the benefits of a 401(k) are too compelling to ignore.
The 401(k) plan allows your employer to deduct a portion of your salary before taxes and invest it—usually in mutual funds—and some employers will match your contribution up to a certain level. For example, the company might match 50% of what you contribute, up to 6% of your income. If you earn $50,000 and contribute 6%, you’ll have $3,000 going into your 401(k), and the company will contribute an additional $1,500 (50% of the $3,000). Company matching funds are as close as most people will ever get to free money. If your employer matches, give yourself a raise by contributing at least enough to max out the employer match.
While your contributions, your employer’s contributions, and any dividends and gains in the portfolio are not subject to income tax immediately, as with IRAs, you’ll pay taxes when you draw on the funds —usually after retirement.
Individuals who participate in a 401(k) or similar plan through their employers can still contribute to a separate IRA, but they probably can’t deduct contributions. If you wish to partake of both tax-preferred investment vehicles, stick to the Roth IRA, which doesn’t allow deductions for contributions in the first place.