Any reader of this site knows that stocks are my asset of choice for building wealth. I love how easy it is to enter and exit an investment position. Stocks are much more liquid than investing in real estate and other physical assets which take longer to sell. You have to locate a buyer for other assets and then negotiate the price. Selling a stock just requires pressing a button and you receive your cash two days after the position is exited. Stocks have also generated greater returns than other assets on an annual basis historically. While I often champion the case for equities, I have not covered the easiest way to purchase stocks. Let’s take a look at the most popular way for how to invest in stocks.
Invest In Stocks Through An Online Brokerage
The most popular way to invest in stocks is by using a brokerage firm. A brokerage firm is a financial institution that helps you buy and sell securities. A brokerage firm is like a middleman that you go through to make stock purchases and sales from an exchange. You can purchase stocks, bonds, mutual funds, certificates of deposits, exchange traded funds, and other securities through most brokerage firms. Brokerage firms charge commissions in the forms of trading fees every time that you buy or sell a security.
The most popular type of brokerage firm for buying stocks is an online brokerage. Online brokers do not require you to meet with anyone in person to sign up. All you need is Internet access to sign up. You can use either a smartphone, tablet, laptop, or desktop. Signing up with an online broker takes about five minutes. You just enter your personal information and create an account. You can create an individual, joint, custodial, or business account. If you don’t have a 401k, you can create your own retirement account with options like a Roth IRA, Traditional IRA, or SIMPLE IRA.
Online brokers give you access to free investment research, free dividend reinvestments, real time trading, and robust trading platforms. This makes it easy to keep track of your investments while just receiving one statement.
Online brokers allow you to buy securities with very low trading fees. Deep discount brokers offer trading for as low as $4. Trading fees to buy and sell stocks at big online brokerages typically average around $6.99 per trade. The low cost makes it attractive to buy shares in bulk. You can buy 100, 500, or 1000 shares of a company and just pay $6.99. That’s an attractive deal because it lowers your expenses. Online brokers are good for investors buying hundreds of dollars in stock or more.
Look at this example. Buying $500 of stock and spending $6.99 on fees means you are only spending 1.39% on expenses. Buying $50 of stock and spending $6.99 on fees however costs you a hefty 13.9% of your original investment. It’s not worth it for low dollar transactions but is a great deal when investing a few hundred dollars at a time.
You can fund an online brokerage account with cash or by depositing securities that you already own into it. Whatever cash you deposit in a brokerage account is placed in a money market savings account until you purchase any stock. All of your deposits are FDIC insured. Stock investments can go up and down but money deposited into the savings is guaranteed. You will receive a little bit of interest on money in savings as well. Today, most online brokers will allow you to start an account with $0. You will need funds to make a purchase however.
The biggest online discount brokers are TD Ameritrade, E*Trade, Charles Schwab, and Fidelity. Although all of these broker have no minimum to open an account, I think that online brokerages are best for those seeking to invest $1,000 or more. The advantage of an online broker is you can construct a well diversified portfolio consisting of stocks, bonds, exchange traded funds and mutual funds all in one place. Online brokers offer real-time trading as well.
Some of the major online brokers are TD Ameritrade, E*Trade, Charles Schwab, Merrill Lynch, Fidelity Investments, TradeStation, Interactive Brokers, Ally Invest. I use TD Ameritrade, E*Trade, and Merrill Lynch as my primary brokers. I am a long-term investor and believe in receiving the maximum number of investment options and keeping my trading fees as low as possible.
How To Buy Stock For Free
Recently, banks have started offering banking customers with significant assets free monthly stock trades through their financial institutions. This is a way of encouraging banking customers to deposit more of their funds and investments at the banking institution.
I love that Bank of America offers free stock trading for accumulating over $25,000 in assets in Bank of America/Merrill Lynch. This has enabled me to invest in stock and pay absolutely nothing in trading fees. It’s free. Once my investment account balance went above $100,000, I started receiving 100 free trades a month. Commission free trading makes it worthwhile to buy only a few dollars worth of stock at a time. Chase, Citigroup, and JP Morgan offer similar free stock trading deals to banking customers.
Check with your local financial institution and see if you qualify for free trading. If not, select a quality discount broker with low fees and a trading platform that you like. Ask about any promo offers for free trades as some brokers offer new customers free trading for a month or two. Online brokers are great for stock, bond, and exchange traded fund purchases but mutual fund purchases may be more costly.
Remember that keeping investment costs to a minimum is one of the keys to getting wealth.