That you can buy stocks online is no surprise — what can’t you buy online anymore? However, knowing you can buy stocks online is different from actually knowing how to do it.
Buying stocks the traditional way can be hard enough. That’s why so many people use brokers to buy their stocks for them, and why even more people simply invest in mutual funds. If you’re looking to buy individual stocks online, however, you have plenty of options.
We recently explained in detail how to set up a brokerage account, but to recap: A brokerage account is a bit like a savings account — you can move money in and out freely — except you use the money to buy stocks or other investments, and those investments aren’t FDIC insured. Some of the most popular online stock brokers — which allow you to trade stocks at a discount compared to traditional brokerage houses — include Scottrade, E*Trade, and Charles Schwab.
- Related: E*Trade vs. Scottrade
With an online broker, you can buy and sell nearly any kind of investment, including stocks of individual companies, bonds, mutual funds, and exchange-traded funds (ETFs). Since you’ll typically pay a commission on each transaction — both when you buy and when you sell an investment — trading too often can eat into your returns.
Also note that you should only start trading stocks in a brokerage account if you have your tax-advantaged retirement savings plans maxed out, your credit levels under control, and six months to a year of living expenses stashed in your savings account as an emergency fund. Once all those ducks are in a row, then it’s time to think about investing — not before.
Index Investing in Your IRA or 401(k)
One of the problems with investing in individual stocks, however, is that it’s incredibly difficult to know which stocks will perform better than others. Unless you’re Warren Buffet or a similar Wall Street wizard (and, in fact, even they get it wrong much of the time), chances are good that you might as well just throw a dart at the financial section of the newspaper and buy whatever the dart lands on.
That might sound discouraging — and in a certain sense, it’s meant to be: Stock picking is best left to the experts, who have the resources to buy in bulk and the time to thoroughly research each company’s financial health.
Investing in mutual funds — collections of stocks chosen by a professional money manager and owned by a large group of investors — whether through your online broker or your retirement account, is one way to leave it to the pros. But even mutual funds present problems. Some funds charge high fees that eat into your returns, and, truthfully, most fund managers are no better equipped to beat the market than anyone else.
This is part of what led to the rise of index funds and exchange-traded funds. With these investments, as with mutual funds, you’re able to invest in the entire stock market or large segments of it (for example, all U.S. technology stocks), rather than just investing in individual companies piecemeal (and paying a commission each time you trade one).
However, because the holdings in these funds are determined by a set index and not hand-picked by an expensive fund manager, they tend to have far lower costs – and that can have a huge impact on your returns over time.
That’s a great bet, because over the long run, the stock market tends to go up — even if you’re not sure which stocks in particular will rise. Investing in index funds will almost certainly allow your money to grow over time through the miracle of compound interest, provided that you leave the money alone.
However, even if you’re able to dodge the damage high fees can wreak on your investments, there’s yet another layer of difficulty here, because buying and selling stocks or funds can result in significant taxes if not done properly.
The pot of gold at the end of this bad-news rainbow is that there’s now a modern alternative to financial planners. Robo-advisors, or online financial advisors, basically let a sophisticated computer algorithm manage your money efficiently and effortlessly.
When you use a robo-advisor such as Betterment or Wealthfront, you tell them what you want to invest in, what your risk tolerance is, and what your long-term goals are, and they do most of the rest of the work for you — automatically investing in low-cost index funds, rebalancing your account, and taking advantage of tax-loss harvesting.
This approach can save you a ton of money in fees — and low fees are the single best predictor of future investing returns. But it can also yield better overall results than even the best (and most expensive) financial advisors, thanks to the automation of buying and selling for tax purposes.
A robo-advisor can likewise help you choose and maintain a smart asset allocation. Most financial advisors say it’s best to come up with an investment plan based on your long-term goals and risk tolerance, and then stick with it. That might mean investing 50% of your money in U.S. stocks, 25% in international stocks, and 25% in bonds.
But as one group of investments rises and another falls, your asset allocation — how much of your money is devoted to each area of the market — can get out of whack. Robo-advisors automatically rebalance your portfolio periodically to cash in on gains, reap tax benefits from any losses, and get your investment plan back on track.
- Related: Betterment vs. Wealthfront
Put simply: Buying stocks online is easy, and yet it’s incredibly complicated to do it well. It’s almost always the best idea to let a professional handle it. With the current level of technology, you don’t need to even pick a professional — you can pick a program that a professional designed. That’s going to help you to grow a significant retirement nest egg, provided that you can leave the money sitting in your account long enough.