For those of you who like to make the decisions and like to be in control, online trading could be exactly what you've been searching for. Online stock trading allows nearly anyone to set up an investment account and start making money in the stock market. Trading stock online puts the investor in control, creating a way for you to bypass the traditional, commission-loving stock broker and moving you a step closer to the market. After all, most stock brokers earn money generating revenue for their firm regardless of how well your investment portfolio is doing. With online stock trading, you have only yourself to thank or blame for how your investments turn out. If this sounds appealing to you, read on to learn more about online trading.
How is Online Trading Different from a Traditional Stock Brokerage?
Before online trading, you had to place an order with a stock broker. He or she may have called you with an idea and solicited an order from you, or you may have had an idea and called your broker to enter an unsolicited order and in exchange you had to pay a fee.
In either case, the broker entered your order into their firm's trading system. These sophisticated computer systems record the order in your account, route the order to the correct exchange or market maker, receive notice from the exchange that your order has been executed and record the fact that you have made a transaction in your account. They also keep track of your positions - the securities and cash that are in your account at any given moment.
When you trade online you cut out the human broker and enter your order into the firm's back office system over the internet. Since your broker doesn't contact you online to suggest stock ideas, online orders are generally unsolicited. You need to come up with your own investment ideas. Fortunately, most of the same tools and resources a broker uses to generate investment ideas are also available to you online and many are available for free. Zecco Trading, for example, provides you with free S&P's analyst research when you're a customer.
Trading stocks online generally results in faster trade executions at a lower cost than going through a traditional stock broker, but you need to do your own research, pick your own stocks and understand a little about how the process works.
Online Stock Trading: What to Expect
Trading stock online is easy. Here's what to expect when you buy stocks online:
First you log into your online brokerage firm's website over a secure internet connection. Your firm will have given you a user ID and a password. Some firms like Zecco Trading, will let you select your user name and password. If you have more than one account with the firm, you choose the account in which you want to trade.
Next you enter the ticker symbol of the stock you want to buy. Ticker symbols are a holdover from the long-ago days when trades were reported by telegraph. They are a kind of shorthand for the stock's name. For example General Electric is - not surprisingly - GE. Apple computer is AAPL. Zecco Trading, similar to some other online brokerages, has a quote search found at the top of every page.
You must then indicate if you want to buy or sell the stock. Usually there is a box to check or a pull down menu. You may also have the option to Sell Short or Buy to Cover - which refers to closing out a short sale you've already done. Short selling is a big topic of its own. Let's keep it simple for now. If you don't own the stock and you want to - choose buy. If you own it and you want to get rid of it - choose sell.
Next you enter the price. There are several different ways you can specify the price at which you want to buy or sell:
- Market orders ensure that your trade is executed, but do not guarantee any specific price. When you place an order to buy or sell 'at the market' your broker is obligated to execute your order immediately at the best price available. Usually this means you will buy at the current ask price and sell at the bid price. If your order is placed when the market is closed, you will generally get the opening price the next day the market is open.
- Limit orders allow you to decide what price you want when you buy or sell a security, but your order may not be executed if the market does not trade through your price. You specify a price below the current market value when you are buying or above it when you are selling.
- Stop orders help you limit your losses. If you are worried about a big drop in the price of a stock you own, you can place a sell stop order below the current market price. If the stock trades at or below your stop price, your order becomes a market order to sell the stock immediately.
Choose your time frame. If your order is a limit order or a stop order, you may make the order good for one day only or good until you cancel it (GTC). Market orders are automatically day orders since they will be executed immediately.
Once these items are all entered, the system will display the order to you to confirm that this order is what you actually want to do. You hit enter and your order goes off for execution. If the market is open, and you placed a market order, you will usually get a trade execution immediately. If you have entered a limit or stop order, the firm will usually send you an email when it is executed.
You usually keep the money and securities in your account when you trade online. If not, you have three days to pay for a buy or deliver securities you have sold into your account.
Stocks & What You Can Trade Online
Most securities are eligible for online trading. Some of the instruments you can trade online include:
- Equities. For the most part, when you see "equities," it is fine to translate it immediately into "stocks". Stocks represent an ownership interest in a company. To learn more about stocks, check out our stock education section.
- Options.
Options represent the right to buy (or sell) an investment for a
certain price, for a certain amount of time. If the underlying stock
moves in the direction of your option, you may either sell at a profit
or exercise your option. If, however, the underlying stock moves
against you, you'll lose your investment. For more on this complex
topic, see our options education section.
- Mutual funds. A mutual fund is a
collection of stocks, bonds, REITs (Real Estate Investment Trust), or
money market instruments. When you invest in a mutual fund, you are
buying a piece of a professionally managed portfolio of many different
securities. How the underlying securities do collectively determines
how well the mutual fund does. Mutual funds are not traded on stock
exchanges, but rather are issued when you buy and redeemed when you
sell.
- Exchange traded funds (ETFs) are gaining
in popularity. Like a mutual fund, an ETF is a collection of tradable
investments (bonds, currencies, equities, etc.). However, an ETF trades
on a stock exchange - just like a regular equity.
- Bonds. Bonds are debt obligations representing money that has been lent to a company or government entity. Many online brokers let you trade bonds online. Since the bond market is much larger and more fragmented than the stock market, this often involves listing an inventory of the bonds that they have available for sale at a given moment. You pick the bond from a list and buy it at the market.
- Foreign exchange (Forex). The Forex market trades foreign currencies. Currency trading takes place in pairs. This means that you can sell the dollar against the euro while at the same time buying it against the yen. You profit by predicting whether one currency will rise or fall against another. Forex trading is risky and not for novices.
- Futures. When trading futures you create a contract, paying a small part of the money up front, for delivery of a commodity such as coffee, orange juice, or bacon on some specific date in the future. Futures are also available on financial instruments such as stock indices and currencies. While you could take delivery of the underlying commodity, most people hope to sell the future at a profit before it expires. Futures are highly leveraged and very speculative.
What Does Buying Stocks Online Cost?
One of the biggest advantages of trading a stock online is cost. Online stock trading is generally done through discount brokers who charge much less than their full commission competitors.
Zecco Trading, for example, offers 10 free stock trades every month when you maintain a $25,000 balance or execute 25 trades each month. Otherwise it's just $4.50 per trade. See details.
Learn more about Zecco Trading commissions and fees.
Fees charged by online brokers vary widely in both the amount charged and how the fee is structured. These fees include:
-
Flat commission fees - A fee for each online stock trade.
-
Per share or contract commissions - Each share is sometimes subject to a minimum fee.
-
Commission - Based on the total value of the trade.
-
Round trip commissions - Often futures firms charge one fee that covers both the purchase and sale of the futures contract.
-
Mutual fund fees - These can include load (sometimes called sales) fees and administrative fees, among other costs. Many online brokers offer no-load mutual funds, but charge a commission to buy them.
-
Margin rates - Interest charged on money borrowed to trade on margin.
Some online brokers also charge fees for things like paper checks, wire transfers, paper statements and copies, postage fees for mailed documents and physical stock deposit.
Check for broker fees, and choose an online brokerage that offers low fees and good service that meets your needs.
Online stock trading can be a great way to invest. But you have to have some idea of what you are doing, and prepare yourself to take full responsibility for your investment decisions. When choosing your investments, research is important. Study the market as well as the individual investments. Know how the market works. Start small and simple. Consider how much risk you can stomach and make use of such tools as limited orders and stop loss orders. Zecco's Asset Allocation pages and Quotes and Research section are good places to start.
After Hours Trading
In the United States, the stock and option markets close at 4 p.m.
Eastern time. However, in today's global economy the market doesn't
ever really close. There are electronic after hours trading sessions
for many stocks. Plus, some U.S. stocks trade on foreign exchanges in
Europe and Asia, just as many foreign stocks trade here as American
Depository Receipts (ADRs). Since some online brokers are now making
after hours trading and access to international stock exchanges
available, buying and selling stocks online can now occur almost any
time of day or night.
After hours trading happens on Electronic Communication Networks
(ECNs). ECNs feature fewer regulations, less transparency and greater
risk than conventional markets. Novice investors should avoid ECNs
until they acquaint themselves better with trading.
The Securities and Exchange Commission offers some great information on after hours trading, as well as answers to common questions about after hours trading.
Opening an Online Trading Account
When opening an online trading account, there are certain things you can expect. Realize that your online broker may run a credit check on you. You will also have to prove that you can handle online investing by answering some basic online investing questions. No one wants to let you trade on margin - or lose money on investments regularly. This can result in losses for the online broker as well. And however you feel about your own losses, you certainly don't want to cause losses for others.
Choosing the Investment Account That's Best for You
When you apply for an online investing account, you will need to figure out what kind of account you want to open. This depends, in large part, on your investing goals. The two main types of investment account are personal accounts (non-retirement) and retirement accounts. Each of these has different subsets of accounts below them:
Cash or Margin Investment Account?
Another thing you need to decide when opening your online investment account is whether you will have a cash account or a margin account. This is a very important distinction. With a cash account, you can only use money that you have immediately available in the account for trades. A margin account is really more of a line of credit. You can make trades, even if the capital isn't available. (You can see, though, that things could grow unpleasant if you regularly choose the wrong investments on margin.)
For more information on Margin, check out our Margin page.
Open an account at Zecco Trading.