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How to invest in stocks: A must-read guide for beginners

At a glance:

  • What is stock investing?

  • Types of stock brokers

  • How to make trades

  • Types of broker orders

  • Summary of buying and selling stock

Buying and selling stock may appear complicated at first, but it is, in fact, quite simple. It’s like a game. It has its own rules, its own set of characters, and its own language code.

To get started, you need a game board and to know the rules. The game board is a brokerage account. The rules make sure that everyone plays fair. Your strategy determines whether you come out ahead or lose.

But make no mistake – investing is not a game. It’s serious business. The more you know and understand about the process and strategies, the better off you will be at the end.

What is stock investing?

Get to know the key figures in trading stock. First, there's you, the investor. Then there are the other principals who facilitate the transactions.

Stock is evidence of ownership in a corporation. Corporations whose shares are owned by persons outside the "corporate family" are publicly traded. The Securities and Exchange Commission (SEC) established the National Association of Securities Dealers (now called the Financial Industry Regulatory Authority) to make rules to assure the orderly commerce in publicly traded stocks.

Using a broker

Persons in the business of trading stocks are brokers and must register with the SEC. When you want to buy (or sell) shares of a publicly traded stock, you will use the services of a broker. A broker (stockbroker) must pass an examination on securities law to be licensed to trade securities. You have a choice of which broker to invest with. Different brokers provide different services.

Going without a broker

Some companies allow shareholders to purchase shares directly from them without having to use a broker. These arrangements are called direct purchase plans, or direct investment plans. Many other companies offer dividend reinvestment plans, in which your dividends are reinvested into more stock, without using a broker.

Licensed individuals are registered representatives of brokers.

Brokerage houses are large firms that deal in securities and may belong to an exchange such as the New York Stock Exchange or the American Stock Exchange.

Stock investing involves risk, including loss of principal.

Types of stock brokers

When you want to buy (or sell) shares of a publicly traded stock, typically you will use the services of a broker.

A broker (stockbroker) must pass an examination on securities law to be licensed to trade securities. Licensed individuals are registered representatives of brokers.

Brokerage houses are large firms that deal in securities and may belong to an exchange such as the New York Stock Exchange or the American Stock Exchange.

Brokers do more than execute trades

Besides buying and selling securities for customers, brokers may provide other services such as doing market research. Most people do not have the time or resources to adequately research companies they consider for investment. The broker can be of assistance. With vast resources, brokers can provide investors with the "market intelligence" to allow them to make wise investment decisions. Other people prefer to do it themselves.

Full-service brokers

Full-service brokers research investments and assist their clients with their investment decisions. For this service, a commission compensates a full-service broker for the transaction. Here are some other services a full-service broker may provide:

  • Investment planning

  • Suggesting good investments

  • Monitoring performance

  • Limited tax advice

  • Margin accounts

  • Access to initial public offerings

Full-service commissions are higher than commissions to brokers who do not provide research services.

Discount and deep-discount brokers

Discount brokers simply execute your trades. They typically do not provide many other services. Discount brokers are compensated with commissions on transactions. Their commissions typically are lower than those of full-service brokers.

Deep-discount brokers execute trades only. Because their customers trade in large quantities regularly, they are able to charge the lowest commissions.

Online brokerages and what they offer

The introduction of online brokerage services – brokerages that assist investors in trading over the Internet – has changed the rules considerably in the brokerage industry. Technically speaking, online brokerage services can be classified into the categories of full-service, discount, and deep-discount.

However, the cost effectiveness of this new medium has allowed many brokerage houses to expand their services while reducing their prices. Many online brokers are beginning to offer services comparable to those of full-service brokers (such as online research materials and online educational materials) at prices similar to or below those of the prices of traditional discount brokers.

When you are choosing the broker and brokerage house that are right for you, it is important to consider all the options. You should select the type of brokerage firm based upon the kind of trading you plan to do and services you require.

How to make trades

Buying and selling stock can be as simple as making a telephone call or going online.

First, you must open an account with the brokerage firm you have selected. You can open a cash account or a margin account.

  • Cash accounts are for investors who will just buy or sell shares of stock with the money that they deposit into the accounts.

  • Margin accounts are for investors who may wish to borrow against their securities or engage in special trading activities such as selling short.

Normally, you can make trades in your account in person, by mail, on the telephone, or over the Internet. Each brokerage firm will advise you of its ability to handle your orders.

Types of broker orders

When you are ready to buy (or sell) a stock, you place an order with your broker. An order gives your broker the signal to buy or sell a particular security. You can give your broker additional instructions:

Limit order

With this order, you instruct your broker to buy or sell a stock at a specific price (or better). You use a limit order when the stock you are interested in is changing in price. This prevents the broker from buying too high, or selling too low.

Stop-loss order

With this order, you instruct your broker to sell a stock if it falls below a specified price. You would do this to prevent further loss. You use a stop-loss order if you are concerned that a stock you own will fall in price.

Good 'til canceled (GTC) or day order

When placing a limit order or stop-loss order, your broker will ask whether you want it to be "good until it is canceled" or "canceled after the close of business." This allows you to control when the order will be executed or canceled.

A broker must execute your orders in a timely fashion. The special instructions give you more flexibility in how you manage your trading account.

Summary of buying and selling stock

More than ever before, individuals are taking an active role in making investment decisions. For some this also involves actively managing their own portfolios. In order to buy and sell securities for your portfolio, you will need a relationship with a licensed securities broker.

Brokers provide a variety of investment products and services. Depending upon your level of expertise and time you wish to invest, you can find a brokerage firm that provides just the level of products and services to suit your goals.

You can even do your investing online. Most major brokerage firms have online services. And there are myriad firms that do nothing but online trading. However, caveat emptor – buyer beware. You get what you pay for and pay for only what you need. Before embarking on stock trading, be sure you know what your goals are, have the resources, and know what you are doing.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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