What Kind of Trade Is Right for You?

Want to invest in the stock market? Start by learning the basics so you feel confident as you begin to trade.

This beginner's guide to online stock trading will give you a starting point and walk you through the basics so you can feel confident choosing stocks, picking a brokerage, placing a trade, and more.

How To Choose an Online Broker

First, you need to open a brokerage account with an online stock brokerage.

Take your time researching the reputation, fees, and reviews for different options. You want to feel sure that you are choosing the best online stock broker for your situation.

As you research, look at trading commission fees (many will offer free trading), how easy the app or website is to use, and whether it provides any research or learning tools for users.

Big firms like Fidelity, Vanguard, and Charles Schwab have both online and app-based trading tools. They have been around for years, have low fees, and are well known.

There are also new platforms that specialize in small trades and easy-to-use apps, such as Robinhood, WeBull, and SoFi. Which style and size of brokerage is best will depend on you.

Why To Research Stocks

Once you have a brokerage, you can buy stocks. However, choosing them can feel tricky.

If you're brand new to trading, stocks may not be the best place to start. You may want to try exchange-traded funds (ETFs) instead.

ETFs allow investors to buy a bundle of stocks at once. This can help if you don't feel confident choosing one company over another.

ETFs built to replicate major stock market indices like the Dow, Nasdaq, and S&P 500 are good places to start. They give your portfolio broad exposure to the U.S. stock market.1

Many traders also diversify, or add variety to, their portfolio by investing in assets other than stocks. Bonds are a popular way to diversify and create less risk to your investments during stock market downturns.

Note

Selecting individual stocks is difficult. To choose well, use financial analysis ratios to compare a company's performance to its competitors. This can help ensure that you're adding the best stocks to your portfolio.

What Kind of Trade Is Right for You?

When you buy or sell a traded asset, such as a stock or ETF, there are different types of trade orders you can place. The two most basic types are market orders and limit orders.

Market orders process, or "execute," immediately. The asset you are trading goes for the best price available at that moment.

Limit orders are a way of having greater control over the price you pay (or receive, when selling). They won't necessarily execute right away. Instead, you set a price at which you will buy or sell a certain asset. This gives you greater control to get the most profit possible.

Once you own a stock, you might consider placing a trailing stop-loss sell order. This allows you to retain the stock as long as the price is going up and automatically sell when the price drops past a certain point.2

Note

No order type is necessarily better than another. By learning as many of them as possible, you can always have the right tool for your situation.

What Will It Cost To Trade Stocks?

One obstacle to successful stock trading is expenses. This is money you pay just to own or trade securities. For example, one type of expense is a commission fee. You should look for low fees when choosing a brokerage.

If you buy individual stocks through a brokerage that doesn't charge commission fees, you might not have any expenses. However, when you start trading ETFs, mutual funds, and other investments, then you need to understand expense ratios.

These funds are managed by a person who is paid a percentage of the fund's assets every year. So, if an ETF has an expense ratio of 0.1%, that means that you will pay $0.10 per year in expenses for every $100 you invest.

You also need to consider your risk tolerance. Imagine your investments suddenly losing 50% of their value. Would you buy more after the crash, do nothing, or sell?

If you would buy more, you have aggressive risk tolerance. You can afford to take more risks. If you would sell, you have conservative risk tolerance. You should seek out relatively safe investments.

Understanding how you would react to losses is one thing, and understanding how much you can afford to lose is another.

For example, you may have an aggressive risk tolerance but no emergency fund to fall back on if you suddenly lose your job. In that case, you shouldn't use your limited funds to invest in risky stocks.

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