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I wrote yesterday about the basics of buying stocks. Now let’s talk about the specific information you’ll be asked for on the trade screen when you execute – or, make – your first trade.
Before you’re ready to buy stocks online you need to have selected an online brokerage firm, opened an account and deposited money in that account. I recommended Sharebuilder.com because of its simple user interface and customer service but there are a number of similar brokerages available that are highly recommended.
Sometimes you have to wait a few days before that money is ready for trading and you can use this time to research your first investment. Once you’ve decided which stock or ETF you’d like to buy, you’re ready to go! Here is everything you need to know about how to buy stocks online in 5 easy steps.
Step 1: Are you buying or selling?
As I recommended yesterday, we’ll start with a low risk index fund. With $1,000, our example trade will buy shares of the S&P 500 index-tracking ETF (NYSE: SPY). Here’s what the order form will ask you:
Are you buying or are you selling? In this case I am buying shares of SPY so I will either select “Buy” or “Buy to Open.”
You’ll probably see other options listed, such as “Buy to Cover” or “Sell Short.” Go ahead and ignore these order types for now. I’ll revisit these order types in future articles.
Step 2: What are you buying?
Stocks, ETFs, and just about every tradable financial asset are referred to by ticker symbols. In the case of the SPDR S&P 500 ETF we’re trading, the ticker is “SPY.”
It’s essential that you double-check the ticker symbol. With so many stocks and ETFs in the market, ticker symbols are almost always similar to that of a completely different stock or ETF. You wouldn’t want to invest in Bank of America (NYSE:BAC) when you meant to invest in Boeing (NYSE: BA). If you are unsure of a company’s ticker symbol try searching for it on your brokerage’s website or use a free service like Yahoo Finance. You’ll often see this listed as Symbol Lookup.
Step 3: How much are you buying?
How many shares of the stock or ETF are you buying? In this case, we’re trying to buy $1,000 worth of SPY. The ETF trades for around $196.30-per-share, so I need to divide $1,000 by $196.30 to determine how many shares I can buy. It’s important to factor your trade commission into this calculation. For a real-time trade on Sharebuilder the commission is $6.95.
The $1,000 we put into our account minus the $6.95 trade commission means we have $993.05 to spend on shares of SPY. Divide this $993.05 by the rounded-up price of SPY $196.30 and we can buy 5.06 shares of SPY. Since we can only buy whole shares of an ETF or stock with this kind of trade, we’ll enter “5” when the trade form asks for the quantity.
Step 4: What kind of order are you placing?
There are several different order types that you should be aware of. Here are the two most common order types.
But first, let’s talk about Bid and Ask. Bid refers to the current price at which the market is willing to buy shares of a stock from you. Ask refers to the price at which the market is willing to sell you shares of a stock or ETF. The difference between these two prices is called the spread.
- A “market” order means that you will pay the current Ask price for the stock, whatever it might be. Here is why you shouldn’t use market orders: If something happens, either major news or a technical glitch at the stock exchanges, you could be stuck with a much higher price than what you saw before clicking “confirm.” This is much less of an issue if you are trading a stock or ETF that has a lot of liquidity – a large volume of shares changing hands – but it’s always best to play it safe and use a limit order.
- A “limit” order can help you avoid the pitfalls of market orders. When you place a limit order you will be asked to enter a limit price. Think of this as the limit to how much you are willing to pay. You can use it to buy a stock if it drops below a certain limit price. You can also buy the shares right away if you simply add a few cents to the current market price to come up with your limit price. If you choose to do this, the trade will execute at the current ask price like it would’ve with a market order, unless it has risen above your limit price. This last part is how limit orders protect you from rapid price fluctuations that market orders can’t protect you from.
Step 5: How long is your order valid?
The trade form also asks for “order duration.” For how long would you like your order to be valid?
If you choose “Today” and your order hasn’t been executed when the U.S. stock markets close at 4pm Eastern Time, that order will be cancelled. If you choose “Good Until Cancelled” then your order will be valid until a cancellation date, usually the last trading day of the following month.
Ok, ready?!
After you have filled out the order form, click “Review” or “Submit.” This brings you to the order confirmation page. Now is the time to double-check everything. Is the ticker symbol correct? Did you enter the correct number of shares? Do you need to adjust the limit price? Go back through the steps to make sure everything is correct.
Once you’ve verified that these details are all correct go ahead and click “confirm” to place the order.
After executing your first trade, now you know how to place a stock trade. You are an investor, congratulations!
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