There are numerous ways to buy a stock you are interested in. Most of them involve a broker through which you can buy (or sell) the stock. After choosing your broker, you deposit the amount you want to invest in an account with them, and they will facilitate the purchase of the shares you want.
In the past, brokers used to take orders via the phone. However, this is less common today. Most brokers provide an electronic trading platform where investors can enter their orders directly. The brokers are usually connected to the exchanges where the orders can be executed (filled).
Other means of buying stocks without brokers include investing through direct stocks plans, and dividends reinvestment plans (to be explained later in this article).
There are different types of brokers depending on the range of services they provide to investors. Brokers who provide a full range of services such as order execution, research and investment advice, financial planning, and others are called full service brokers. On the other hand, brokers who provide only order execution services are called discount brokers.
Opening an account with a full service broker requires an application. Usually, the broker will request a minimum of deposit to instate your account, in addition to identity documents, and perhaps other legal documents if applicable.
The type of account usually differs based on the capital you intend to invest. The fees structure may be different as well since brokers may offer incentives in terms of lower fees to clients with bigger capital to attract them. Investors need to take into account other considerations as well when opening an account such as the reputation of the company, whether it is regulated by the authorities, and its execution efficiency.
One option is to open a leveraged trading account (or trading on margin account). This account allows you to trade using a bigger capital than the one you initially invested. For example, if you deposit a $10,000 you may be allowed to trade using 1,000,000. The broker lends you money to trade using a bigger capital during the time your positions are open. The broker retrieves the money when you close the position, but you keep the profit (or pay for the losses). Trading on margin is risky and can involve losing your capital very quickly, therefore caution is advised when using leverage.
Full service brokers usually charge a fee per trade (a commission) unlike robo advisors which reduce costs and fees significantly.
Example of full services brokerage firms are: Merril Lynch, Raymond James, Edward Jones, and Ally Invest Advisors.
Similarly to many other fields, the field of finance has benefited heavily from advances in technology and automation. Many companies today offer you the service of financial planning done by a robot financial planner. Your job will be to provide your main financial data, and the planner will process this data and provide with financial plans and projections, which can cover budgeting (or managing expenses) as well as managing savings.
Robotic Financial advisors also personalize the portfolio that is best suitable for your needs. Your role would be to provide the automated advisor with your desired investment parameters such as your long term investment goals, and your risk tolerance levels. Based on your parameters the robot advisor will provide you with the best composition of your portfolio in term of equities, bonds, and foreign currencies. The services also include rebalancing the portfolio to maintain optimal composition and selling stocks that have made a loss to make gains on taxes (knows as tax-loss harvesting). In addition, the services can include education in investment as well as planning for retirement.
In general, robo advisors work with minimal or limited human intervention, since when you use one, you will be outsourcing your investment decision making process to them. The fees vary but generally, they are calculated as a percentage of assets under management. Also, the fees are generally much lower than the fees of human advisors.
Leading Examples of financial advisors include Betterment and Wealthfront
Betterment is a leading robo advisor which is considered as the first in the industry. The product puts your investments in exchange traded funds based on your preferred risk parameters. The product allocated all of your capital in investments, up to 100%, and enables you to have a personalized retirement plan. The fees are also low ranging from 0.25% and up to around 0.40% annually of the funds under management. There is a minimum deposit to start investing with Betterment. It also boosts investing in socially responsible investments.
Betterment’s investment strategy focuses on healthy diversification as usually the portfolio would include investments from various sectors to ensure healthy exposure to risk. Furthermore, the investor can initially provide information about his risk tolerance levels (or risk profile), based on which the robo advisor would design the portfolio composition.
Wealthfront is the other leading robo advisor which was among the pioneers in the industry as well. The minimum investment required is $500. This product is best for tax optimization on balances of $100,000 and college savings. Wealthfronts invests in exchange traded funds and individual securities in some accounts. Wealthfront offers a better tax harvesting strategy with
Advances in technology have given rise to new business models which are increasingly efficient when it comes to costs. An example of these business models is the broker Robinhood. Robinhood charges no commission on your trades (compare this to normal brokers which charge a fee per trade). The company collects interest on cash and securities in its accounts, similar to the way a bank works.
Shareholders of successful companies usually receive regular payments in return for their investment, which is usually called a dividend. Investors have the option of either withdrawing the dividends and keeping the shares, or reinvesting those dividends directly with the company. The dividends are used to buy shares or fractions of shares within the same company at the dividend payment date.
This option is a better one for a longer term investment horizon, and for investors who have the financial means to keep reinvesting the dividends. This program is excellent for investing in promising companies and it offers the advantage of reducing the cost of shares since the extra shares purchased are bought at lower prices than market prices, i.e. at a discount.
An example of a good DRIP program is Cisco System with a yield of 2%.
Mutual funds gather capital from different investors and invest it in a single portfolio. Investors own shares in the fund in proportion with the capital they have invested.
There are mainly two plans for investing with a mutual fund — the direct plan and the regular plan.
In the direct plan, the investor buys directly into the mutual fund’s portfolio without the need for a broker by going directly to the mutual fund or visiting their website.
In the regular plan, the investor buys into the mutual fund through an intermediary such as a broker and receives expert investment advise (which costs more money).
The main difference is the fee structure since the direct plan is offered for lower fees in general.
An order is simply a request to buy or sell a stock. Orders to buy or sell assets in the market can be classified into two main categories: market and entry orders.
The order is executed when the investor initiates it and at the current market price. Sometimes the buying (or selling) price is slightly different from the market price at which the investors initiated the order. The different between the execution price and the initial market price varies depending on the broker’s execution efficiency, and is called slippage. When you place a market order, you don't know exactly what price your trade will execute at — it will execute at whatever the market price is at the moment. This may mean that your trade is broken up into several smaller pieces with different prices and then executed (depending on the current order book and interest on the other side of the trade).
Entry orders are future orders. They are usually set by the investor to be executed when the market reaches a certain price level. This type of order should not involve slippage since it should be executed at the exact price that the investor requested. If the price does not reach the price level in the order, the order is not executed. There are many types of entry orders.
When the investor wants to buy an asset at a price that is lower than the current price, the order is called buy limit. Investors usually select this type of orders when they want to buy a stock at a cheaper price.
When the investor wants to buy an asset at a higher price than the current price, then the order is called buy stop. Investors use this order when they are waiting for the price to reach a certain price level to confirm its direction.
When the current price is lower than the price at which the investor wants to sell the asset, the investor sets the selling price at a higher point and the order is called sell limit. Investors use this order when they want to sell the stock at a more expensive price than the current price.
If the investor wants to sell at a lower price than the current price level, she sets the entry price at a lower point than the current price. This order is called sell stop. Investors use this order when they want to confirm that the price has declined to a certain level before selling, to confirm the direction downwards.