So, you’re ready to start investing online but don’t know where to begin? Then you’ve come to the right place, as here at OnlineInvestorGuide.com you can learn how to get started setting up your own portfolio as well as gain insight about various investment products.
Before you get started, you may want to check out 10 Reasons Why You Should Invest Online to learn more about the benefits of going through online brokerages.
If you’re ready to roll, here’s what you need to do:
1. Ask yourself why you’re investing. Ultimately, a lot of the other decisions you’ll have to make, such as how much capital to commit, which broker to go through, and what products to invest in, depend on your personal reasons for investing. If your answer is simply I want to make a lot of money, then you need to simmer down and refocus, as people with that attitude generally don’t take the time to develop a proper investment strategy or an understanding of how markets work, and more often than not are the ones who lose their shirts when their heavy risk-taking backfires.
So what are some reasons you may want to start investing? Here are a few common ones, but think over which of these or others may be most applicable to you:
- To generate returns on personal savings higher than that offered by bank savings accounts or CDs
- To gain exposure to certain companies that you think will deliver strong returns to their shareholders
- To diversify your overall portfolio
- To learn about financial markets and personal investing through hands-on experience
- To speculate on the future direction of market movements
- To generate profit by taking advantage of what you believe to be mis-pricings in the market
- To hedge your exposures to other assets, such as commodities or foreign currencies
2. Decide how much to invest. This is an important question that should take into account your personal finances, investment goals and strategy, and future liquidity needs. If you have a job that just barely pays the bills and you plan on speculating in a wide range of risky products, you’ll be well advised to limit your initial deposit to a reasonable amount. On the other hand, if you have a large portfolio divided between real estate and savings accounts earning 0.02% annual interest, you could comfortably transfer a much larger amount from your bank to an online investment account from which you could invest in a variety of safe, conservative funds that will still provide much more attractive returns than bank interest (which has remained at record low levels for years).
If you have a modest portfolio or are mainly looking to gain experience, most online brokers will let you start an account with as little as $500 or $1000.
3. Choose an online brokerage. In order to find a platform that’s best for you, you should first ask yourself the following three questions:
- What products will I be investing in?
- How many transactions will I make per month?
- What sort of other services, such as news or technical analysis, do I need from an online broker?
Your answers to the above questions will largely determine which broker service is right for you. Check out our Broker Comparison page for help on finding a great low-cost broker to meet your investing needs.
4. Fill out the paperwork and make your first deposit. When signing up for an online brokerage account, you’ll have to fill out a bit of paperwork that the broker will have to keep on file for tax and regulatory purposes (this can usually be submitted by snail mail, fax, or scanned and emailed in). In addition, if you happened to be employed by a registered securities dealer, your employer will also have to submit documentation acknowledging your application for an account.
Many account applications will ask if you’re interested in applying for a margin account, which is a way of increasing your buying leverage. This means that while you only deposit $5000 in your trading account, you may be given $10,000 of buying power. When you use margin to buy securities, you will be charged a low rate of interest for the money you’re borrowing, so be aware of what rate the broker is charging you.
If you intend to trade options, you’ll usually be asked to fill out a separate questionnaire regarding your income, investing background, net worth, and other details that the broker will use to decide what sort of options to permit you to trade. The purpose of this form is to gauge your sophistication as an investor and ability to take on risk, so be aware that your answers to these questions will determine what type of investment privileges you’ll be given.
Once your account is approved, which is generally a matter of days, you’ll be able to make your first deposit. The most common ways to do this are by check, wire transfer, or electronic funding. As checks need to be mailed in and be cleared before the balance is credited to your account, this method generally takes the longest. A wire transfer can also take a few days as the funds will need to be verified through an automatic clearing house (ACH), while setting up electronic funding by directly linking your bank account to your broker means that you could have funds appearing in minutes once the account has been verified.
5. Learn the system. Before you begin trading, it’s a good idea to figure out how the platform works, as slip-ups could potentially be costly. Make sure you know how to input stop-loss and take-profit orders, and how to view and manage your account balance. Try to learn how to use the other features the platform has as well, such as historical prices and charting tools.
6. Make your first trade. Finally you’re ready to go! Once you’ve done your research and decided what stock or other security to buy, you’ll have to enter the ticker symbol, quantity, as well as order type and any other applicable details. For example, if you enter a limit order to buy 100 shares of Google, you’ll have to enter the limit price (highest price you’re willing to pay) as well as specify how long the order should remain outstanding if it isn’t filled; the two most common specifications are good-for-the-day (GFD) and good-til-canceled (GTC). If you’re doing an options transaction, things will be a little different, but we cover the basics of that in our Intro to Options Trading.
7. Continue to monitor your account and positions. Even if you’re employing a long-term buy-and-hold strategy, you should regularly monitor your positions for any new developments that should make you re-evaluate your portfolio allocation. As every decision should be made with the best information available at the time, you shouldn’t stubbornly hold onto a stock you bought a month ago if new information has come along that suggests worse prospects than you had initially forecast. Stay disciplined, up-to-date, and you’re all set to become a successful investor.