The internet has made stock trading possible even for beginners. Today, you only need an online brokerage account to trade in stock, and keep tabs on your investments. But even as you do so, keep the following tips in mind.
1. Choosing a Stockbroker
To begin stock trading, you need to open a brokerage account with the best online brokerages you can find. They do the trading for you, and get a commission in return. You can choose either one of the two types of brokers: full-service brokers and discount brokers.
The first analyzes your finances before recommending stocks that best suit you, and then takes your order. Go for this broker if you lack the time to analyze the market yourself. The second only buys or sells what you order him or her to, and never tells you what to buy or when to sell. Only go for this broker if you are familiar with the stock market.
After you deposit money into the brokerage account, the brokerage firm then uses it to acquire investments for you. You then receive a trade confirmation every time a sale takes place. It contains detailed information on the investment you traded, so read it carefully. Check for errors and report them to your broker immediately.
2. Placing a Trade
Placing a trade is the next step after choosing a broker. This means buying stock, bonds, exchange traded funds and mutual funds. You place a trade by logging into your brokerage account or calling your broker. It helps if you know the types of orders you can make using your stock broker. They include market orders, limit order, and all-or-non orders among others.
3. What are Frictional Expenses?
You incur frictional expenses during stock trading, which compromise your investment performance. One such expense is brokerage fees. Reduce these fees by using discount brokers whenever possible, for they are cheaper. Only keep in mind that to use discount brokers, you need to know your way around the stock market.
The second frictional expense is asset management fees. Although asset management firms specialize in high-end clients, their 1.5 percent commission fee is still high when viewed in the proper light. For instance, if a firm is managing assets worth $20 million, you incur $300,000 in fees every year. Unfortunately, the fees are often worth it, so there is no escaping them.
4. Using Borrowed Money to Buy Stocks
You can borrow money on existing stock to buy more stock. This practice is known as buying on margin. It lets you buy more stocks than you can afford, which can be a risky practice. You are in a sense living above your means. And if you miscalculate – and people often do, you might find yourself filing for Chapter 7 bankruptcy. So, only buy on the margin if you know what you are doing.
5. Stock Trading and Taxes
If you sell assets for lower than you bought them, you can claim a capital loss with the IRS. And by doing so, you lower your tax bill. But there is a catch. To make this claim, IRS regulations stipulate that you must not repurchase the stock for the next 30 days. These regulations are known as the wash-sale rule. If you violate it, you cannot write the loss off your taxes.
As you get into online stock trading, choose your online broker and know how to place a trade. Also, know how to reduce frictional expenses and stay on the right side of the taxman. Finally, never use borrowed money to buy stocks, for it could bankrupt you.