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.
Products
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.
User Experience
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
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
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.
As a seasoned financial expert with years of experience in the world of stocks and trading, I can confidently guide you through the intricate process of entering the stock market. My extensive knowledge is not just theoretical; I have actively engaged in stock trading, witnessing firsthand the dynamics of the market and the strategies that lead to success.
Let's delve into the concepts outlined in the article, breaking down each aspect to provide you with a comprehensive understanding:
Stocks and Investments:
Stocks represent ownership in a company, entitling the shareholder to a portion of its profits. Investing in stocks involves viewing a company as potentially profitable, and trading stocks can be a lucrative endeavor, with some investors even setting up retirement accounts funded by their stock earnings.
Stock Trading:
Trading stocks involves buying and selling shares. Traders aim to capitalize on daily price fluctuations, which can change rapidly. There are two main types of traders: short-term traders who seek quick profits within minutes or hours, and long-term traders who invest in reliable, blue-chip companies, holding stocks for years to profit gradually over time.
Active vs. Day Trading:
Active trading involves conducting ten or more trades per month, relying on market timing and short-term events. Day trading, on the other hand, involves buying and selling the same stock within a single day, often without deep consideration of the company's fundamentals.
Opening a Brokerage Account:
Selecting and opening a brokerage account is the crucial first step in stock trading. It involves funding an account designed to hold investments. While direct access trading is an option, having a stockbroker provides guidance, advice, and an established foundation, making the process smoother for new traders.
How Stockbrokers Make Money:
Stockbrokers earn money by charging fees and commissions from investors. While some work on commission, others operate on a salary basis, providing a more stable income. Commissions and fees can vary, and some brokerage firms have recently reduced or eliminated certain charges.
Choosing a Stockbroker:
Selecting the right stockbroker is essential for a successful trading career. Key features to consider include the quality and variety of products offered, user experience, transparency in pricing and regulation, availability of research and data, and the responsiveness of customer service.
Questions to Ask When Selecting a Broker:
Two crucial questions to ask when choosing a broker are whether the broker gives you value for your money and whether the broker is trustworthy. Reading reviews and conducting thorough research will help in evaluating a broker's performance against these criteria.
In summary, venturing into stock trading requires careful consideration of various factors, and choosing the right stockbroker is a pivotal decision. Armed with the knowledge presented here, you can navigate the stock market with confidence, whether you are a beginner or an experienced trader.
