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After the GameStop frenzy unfolded earlier this year, you might think investing is all about trading hot stocks and making bets on day-to-day fluctuations in the market.
We are here to tell you there is a safer and better way to buy stocks online. It involves a bit of research, but it’s pretty simple once you get the hang of it.
New technology has made investing more accessible, but there is a ton of volatility and risk with short-term stock trading. That’s why many experts recommend using reputable online brokers to buy and hold index funds that give you broad exposure to a number of high-performing companies.
Here are seven easy steps you can follow:
Step 1: Choose the Right Type of Investing Platform
There are many platforms available for investing — including apps, human brokers, and online brokers.
|Trading apps||Trading apps make stock trading fast, cheap and convenient.||These apps, especially Robinhood, tend to gamify the investing process and tempt you to buy and sell stocks without doing enough research.|
|Personal brokers||Professional traders have market insights and experience that can help guide your decisions.||Using a personal brokerage may come with high management fees and lower returns.|
|Online brokers (recommended)||Offer lots of control and flexibility, and tend to have lower fees than traditional brokers.||Investing online, like with apps, doesn’t have the benefit of guidance from a professional.|
Any of these options could work for you, but for the purpose of this article, we’re going to focus on using online brokerages.
Step 2: Select an Online Broker
Choosing the right online broker comes down mostly to personal preference. The technology of each broker varies a bit, and they offer slightly different features.
But if you stick with the big, well-known online brokerages, you can’t go wrong.
Some examples of major platforms include:
- TD Ameritrade
- Charles Schwab
Step 3: Research the Stock Market
There are a lot of different ways to research the market. Tolitsky recommends using Yahoo Finance, which is an easy way to see a stock or fund’s price, performance over time, and other information. Rogovy also suggested diving into books, podcasts, or investing courses by finance professionals. Steer clear of online message boards, though. They are filled with unverified advice.
As a beginner investor, you might naturally be drawn to established blue-chip companies that tend to be safer bets. Those can help you get started as you learn more about the research process. “You want to choose stocks that align with your investment strategy and that you think personally are going to do well in the future,” Tolitsky said.
But the most cost-effective way to achieve a balanced, growth-oriented portfolio is to buy index funds. Index funds are groups of stocks that are sold together, and they track the performance of a particular market or sector. For example, the S&P 500 index fund follows the performance of the 500 largest public companies in the U.S. Other index funds track particular sectors, like tech or health care.
Step 4: Decide How Many Shares to Purchase
Determine the total amount of money you’re working with. Let’s say you’ve set aside $1,000 to purchase stocks. If you invest $100 in each company, and a company’s shares are selling at $10 each, you’d buy 10 shares. If the stock is worth $20, you’d buy five shares.
What you don’t want to do is put the whole $1,000 investment into one stock. It’s better to diversify or spread that out among a wide range of companies to reduce your risk.
You can do this with index funds. How it works is you invest your $1,000 into one index fund that is made up of a grouping of low-cost but high-performing stocks.
If you’re looking to start buying stocks online, do your research and get comfortable with an online platform before you start investing serious money — and always keep your investments diversified.
Step 5: Understand Stock Order Types and How to Choose
When you’re purchasing stocks, there are two main stock order types you’ll want to consider: a market order and a limit order.
With a market order, you’ll purchase the stock right away at the current offer price. But because the stock market changes rapidly, the price is not guaranteed to stay the same with a market order.
If you want more control over the stock price you’re buying, you can set parameters with a limit order. This allows you to set a minimum or maximum price, and the purchase won’t be executed unless it meets those criteria. This can help prevent you from overspending on a certain stock, especially in a volatile market.
For index fund investors, most experts recommend a strategy called dollar-cost averaging, in which you invest the same amount of money at fixed intervals, such as once per month or once per paycheck, via a market order. This helps you stay consistent with your investing and also decreases the odds of buying at an unfavorable price.
Step 6: Diversify Your Portfolio
To reduce your risk of losing money across your portfolio, Tolitsky recommends spreading your investments over a variety of companies and industries.
That can protect you in the case that an entire industry gets hurt — as many did during the pandemic — or if a particular company starts to fail. No more than a few percent of your total investment should be in any one company, says Tolitsky.
“Holding 30 stocks spread across various sectors and styles achieves extremely robust diversity,” agrees Rogovy.
Buying an index fund is the best way to achieve a diverse and easy-to-manage portfolio.
Step 7: Maintain Your Account
Once you’ve got the hang of online stock buying, it’s important not to forget to maintain your account. Proper account maintenance includes these two steps to grow wealth.
- Time in the market. Keep your money in the market for as long as possible. Compound interest will work its magic and help it grow until it’s time for you to withdraw it.
- Refuel your account regularly. Continue to contribute as much as you can afford. Many experts advise setting up recurring contributions and treat it like another bill that needs to be paid.