It can be both exhilarating and highly exciting watching your stocks making money on a daily basis! No longer is this the domain solely of the Gordon Gecko’s or those young city slickers. All you need is a PC, a decent credit score and enough cash to open an account.
Sounds straight forward doesn’t it? But it can also be fraught with danger if handled in the wrong way. Do it right and the rewards are well worth the risk, but it’s important to safeguard yourself and be professional in your approach.
Stock Market Basics
Most people know what a share is – it’s a small part of a company or corporation. It’s a division of stock! Shareholders are in essence investing in the future of a company, and the price of these shares will fluctuate in an economic climate. When firms put out stock for sale to the public this is known as ‘The Initial Public Offering’ or ‘Going Public’. When the company makes profit they share this with the stockholders in the form of ‘dividend’. Anyone can either save this profit or reinvest it in the corporation. Stocks availing regular dividends are ‘Income Stocks’ – those being reinvested are known as ‘Growth Stocks’.
A broker is a person licensed to trade stocks through one of the many exchanges. He or she will charge a commission to do this either over the telephone, online or on the trading floor much like the New York Stock Exchange.
An exchange is just a place where people both buy and sell stocks. If you choose to do this online you’ll be using an online broker instead of a human using real money. The individual will make all the decisions and request all trades themselves. If you’d rather have a broker assist with your trades you’ll need to go a firm offering this sort of service. Before you begin choosing a broker however, you should jot down four important points:
- You’ll find a lot of companies requiring clients to have a minimum amount of money to open their account with. You should work out how much money you’d like to invest. This should be money you can afford to lose!
- Do you intend to make a lot of trades or will you buy stocks with the aim of holding onto them? Some firms will charge for account inactivity, others offer low fees per trade. Do your homework!
- If you’re a beginner then you’ll need to choose a brokerage giving you lots of guidance and information. Some will cost more than others
- Will you require any more services like bonds and futures or are you just specifically sticking to trading stocks?
Selecting an Online Broker
Remember your online broker will carry out trades on your behalf. Both stocks and money will be kept in an account. There are many companies out there just as there are many stocks to invest in however so good research is paramount! Take a look at sites such as ‘Keynote’ and ‘Smartmoney’. The fact is these brokerages aren’t ranked so you’ll need to shop around for the best deals. Any broker must have good security and should be highly reputable. Check out ‘The Investing Online Resource Centre!
Opening an Account
In the United States you’ll be asked questions about your financial past and possible investments. This is to protect you from delving in trades you can’t handle. They’ll need the usual basic information but also your social security number. Your investments will be tracked by the brokerage in line with tax regulations.
What Sort of Account Will You Need
You’ll need to decide between an individual or joint account and remember there are other accounts for retired people or children. Next up will be a choice of either a margin account or cash account. A cash account works in the same way as a checking account but a margin account is like a credit line or loan. You will be able to borrow money from the brokerage based on stock equity you own. The margin is the equity built into the account. Collateral if you like!
‘You will need at the very minimum 50 per cent of the price of the stock you wish to buy in your account. If say to were going to purchase $3,000 of stock – you’d need $1500 in your account. The other half would be borrowed from the brokerage involved.’
After you make the buy you must retain enough equity in your account. ‘The Equity Percentage’ must cover 25 per cent of the purchased securities. If your equity percentage slips below the line the broker can issue ‘An Equity Call’. This means they are entitled to sell some or all of your assets to bring this equity back to the minimum. They do not have a requirement to contact you!
These margin accounts can be quite complicated and of course borrowing means you carry more financial risks. A cash account is much better to begin with until you get more experienced!
How Will I Deal With Storing Money Between Trades?
This is important as some brokers avail interest-bearing accounts so an individual will make money even when they are not trading. Once you’ve worked your way through the process then of course it’s time to fund your account ready for trading. Some companies will accept a check – you can make wire transfers or even transfer money from another brokerage you may have been using. Once money has found your account then the really exciting part begins.