How to make money on the stock exchange via the Internet
Photo courtesy Pixel Perfect Digital When you open an account with a United States online brokerage, you'll answer questions about your investment and financial history. These questions determine your suitability for the account you are requesting -- the brokerage cannot legally allow you access to investments that you cannot reasonably handle.
You will also have to provide your address, telephone number, social security number and other personal information. In addition to providing this information, you must make several choices when you create an account. With most brokerages, you can chose between individual and joint accounts, just like at a bank.
This beginner's guide to online stock trading will give you a starting point and walk you through the basics so you can feel confident in assessing your options, picking a brokerage, and placing a trade.
You can also open custodial accounts for your children or retirement accounts, which are often tax-deferred. Unless you pay a penalty, you can usually retrieve earnings from a retirement account only when you retire. Advertisement Advertisement Next, you must choose between a cash account and a margin account.
You can think of a cash account as a straightforward checking account. If you want to buy something using your checking account, you have to have enough money in the account to pay for it. Using a cash account, you have to have enough money to pay for the stock you want. A margin account, on the other hand, is more like a loan or a line of credit. In addition to the actual cash in the account, you can borrow money from the brokerage based on the equity of the stock you already own, using that stock as collateral.
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Then, you can buy additional stock. Your margin is the equity you build in your account. According to the Federal Reserve Board, you must have at least 50 percent of the price of the stock you wish to purchase in your account.
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Once you have made your purchase, you must keep enough equity in your account, also called your equity percentage, how to make money on the stock exchange via the Internet cover at least 25 percent of the securities you have purchased.
Here's how the brokerage determines this number: The market value of your stock minus the amount of the loan you took to buy the stock is your how to make money on the stock exchange via the Internet amount.
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Your equity amount divided by your total account value is your equity percentage. If your equity percentage falls below the minimum, the broker has the right to issue an equity call.
Typically, the brokerage will try to contact you, but the firm has the right to sell any and all of your assets to raise your equity percentage to the minimum.
The brokerage is not obligated to contact you.
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Margin accounts are definitely more complex than cash accounts, and buying on credit presents additional financial risks. If all of that sounds overwhelming, it's a good idea to stick with a cash account.
Finally, you must decide how the brokerage will store your money between trades. Many brokerages offer interest-bearing accounts, so you continue to earn money even when you are not trading.
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Once you have made all these choices, you must fund your account. You can make a deposit by check, make a wire transfer to the brokerage or transfer holdings from another brokerage.
When your account is open, you're ready to trade. We'll look at the trading process next.
Can You Earn Money in Stocks?
Bull vs. Bear Market analysts use the words "bull" and "bear" or "bullish" and "bearish" to describe whether the market is generally rising or falling. If you have trouble remembering which is which, just think of the way the two animals attack.
Bulls toss their horns upward, and bears swipe downward with their claws.
Advertisement Making Trades Once you've opened and funded your account, you can buy and sell stocks. But before you do that, you want to get a real-time stock quote to confirm the current price of the stock.
Your brokerage may provide real-time quotes as part of your service. Many free financial news sites offer delayed quotes, which are at least twenty minutes behind the market. If the market is moving quickly, a delayed quote can be substantially different from the real trading price.
This content is not compatible on this device. Once you've gotten your quote and decided you want to make a trade, you can choose to place a market order or a limit order. A market order executes at the current market price of the stock. A limit order, however, executes at or better than a price you specify. If the price doesn't reach the limit you set, your trade will not go through. Advertisement Advertisement This content is not compatible on this device.
Some brokerages offer additional options, often used to prevent high losses when a stock price is falling. These include: Stop order - A form of market order, this executes after the price falls through a point that you set.
The order executes at market price, not at the stop point. Stop limit order - These are like stop orders, but they execute at a price you set rather than market price. In rapidly moving markets, the broker may not be able to execute your order at your set price, meaning that the stock you how to make money on the stock exchange via the Internet may continue to fall in value.
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Trailing stop order - Like a stop order, a trailing stop executes when the price falls through a point you set. However, its selling price is moving instead of fixed. You set a parameter in points or as a percentage, and the sale executes when the price falls by that amount. If the price increases, though, the parameter moves upward with it. You must also select whether your order stays active until the end of the day, until a specific date or until you cancel it. Some brokerages allow you to place "all or none" or "fill or kill" orders, which prevent a partial rather than complete exchange of the stocks you want to trade.
Learn the Ropes If You're a Newbie to Online Trading
Contrary to many people's perceptions, making trades online is not instantaneous, even if you're placing a market order. It can take time to find a buyer or seller and to electronically process the trade.
Also, even though you can access your account and place buy and sell orders twenty-four hours a day, your trades execute only when the markets are open. An exception is if your firm allows after-hours trading, which is riskier due to the reduced number of trades taking place.
Lots and Day Trading A block of shares of stock is called a round lot. Any other number of shares is an odd lot. Before the development of electronic exchanges, many brokers charged a fee for trading in odd lots. You may remember stories of people becoming millionaires as day traders during the early days of online trading and the tech stock bubble. Some people still use online brokerages to make their living as day traders. But capital gains taxes, commissions and fees for trades can significantly reduce a day trader's profit.
In fact, most new day traders lose money for several months before they give up or learn to gauge the market well enough to make a profit.
Learn As You Grow
Advertisement Online Stock Fraud With erratic prices, corporate scandals and "market corrections," you may think you already have enough to worry about when it comes to trading stocks. But there is one more important worry to add to the pile -- investment fraud. Long before the days of online trading, a few unscrupulous brokers defrauded investors or absconded with their money. Fraudulent firms known as boiler rooms have also employed brokers to make unsolicited phone calls to investors, selling bogus or overvalued stock.
People must evaluate their broker's ethics and judgment, and part of the broker's job is to protect investors from fraudulent stocks. Advertisement Advertisement With online trading, though, people must research stocks on their own, deciding what to buy and sell without the help of a broker or an investment planner. Fraudsters have taken advantage of this, leading to several notable methods of defrauding investors. These include: Pump-and-dump schemes - People spread the word about a "sure thing" stock via online message boards, online stock newsletters, email and other methods.
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The resulting interest in the stock drives up the price. The organizers of the scheme sell their stocks for a huge profit, and then stop promoting it.
Investing for Everyone
The price plummets, and investors lose money. Fraudulent IPOs - Some investors like IPOs because they provide a chance to "get in on the ground floor" and to make a substantial profit. Some scammers, though, spread the word about an upcoming IPO for companies that never intend to go public or that don't exist.
Then, they abscond with investor' money. After investors buy stock in non-existent companies, scammers simply take the money and run. Fraudulent company information - Publicly traded companies have to release information about financial performance.
Overstating or misrepresenting a company's goals and achievements can drive up the stock price. Fortunately, you can protect yourself from most of this by doing your own research. In addition to researching your brokerage, you should research any company you plan to invest in, including reading annual reports and financial statements. Also, it's always a good idea to remember that if a stock deal seems too good to be true, it probably is. Other Online Investments In addition to buying and selling stocks, you can make a number of other investments online, depending on what your online brokerage offers.
Several firms allow investors to participate in IPOs. Some also allow you to trade in: Options - contracts granting the right to buy or sell stock at a specific price on earnings on the Internet site Peter 1 before a specific date Mutual options for dummies - companies that combine many people's money and invest it in a variety of companies Bonds - loans to companies or businesses that are repaid with interest Futures - agreements to buy or sell stock at a future date Most investment analysts consider options and futures to be the territory of experienced investors.