You've got the dough and you've got the desire. You want to get into the market. So how do you do it? Is there an "Investing For Dummies" book at Barnes & Noble?
You've read all those articles and seen all those commentators on CNBC saying things like, "Well it looks like you should pull out your tech stocks and start investing in gold and silver."
You think to yourself, "OK, where is this magical store that sells chunks of silver and gold?" You don't need to find this "store." What you need is a broker.
First erase those images of you sitting behind a giant mahogany desk screaming, "BUY! SELL!" You're looking for a discount broker, not Michael Douglas's character from the movie "Wall Street." Specifically, you want one who executes trades via the Internet.
Your broker is your connection to the markets. You can't just drive up to the New York Stock Exchange and order a few shares like a Big Mac. You have to go through somebody who's already registered and has a seat on the exchange. In the past, brokers were guys in gray suits who called you from a local office asking you to buy this or that. Most business was conducted on the phone or in person. Thanks to the Internet, now you can find a broker, open up an account and conduct business without even having to use the phone. Sites like Datek.com now allow people to open an account and receive full access to their resources without even having to send in a check.
So you've sent in your money and you can see your balance on the screen. You also have access to all the brokerage's resources, like quotes, graphs and breaking financial news. So how much is this costing you? So far, nothing.
You're only charged money from your account when you execute a trade. This is the broker's commission. How much you pay varies by which broker you decide on using.
"An online trade costs just $9.99 up to 5,000 shares regardless of order type," said Thomas Zdanowicz, a support representative at Datek Online. "Upon execution, this commission is deducted from a sell order and added to a buy order."
But $9.99 only covers your buy order. When you want to sell, you've got to pay another $9.99.
"The first trade I did, I made $15 in five minutes. I was stoked," third-year economics major Jarrett Spencer said. "Then I realized I actually lost money due to commission. Give it up for the fine print."
Zdanowicz mentioned "order type." When you place an order, you don't just click a button labeled "Buy." You have to let the broker know how you want to buy it. There are two main types of orders: market and limit, and there are pros and cons for using each of them.
When you enter a market order, you put in which stock you want and how many shares you want. This order shoots straight to the exchange, where your broker will attempt to fill that order for you, no matter what the price. These orders are usually filled within seconds because you're not buying at a specific price, you're buying "at the market."
However, sometimes the stock you're looking to purchase may be moving its price very quickly. You see its price is at 34 when you enter your market order. When you're filled you realize that the price was moving so fast that when you bought it, you got in at 35.5. That's 1.5 points you could have made if you'd only gotten in sooner. Other times, brokers on the floor of the exchange who see a market order will fill your order a couple of cents above the current price and pocket the difference.
This is called scalping and it's legal.
To reduce this risk, people only use market orders when they want to enter a trade as quickly as possible.
On a limit order, you enter the stock you want, how many shares you want and then what price you want it at. This doesn't mean you can put in an order for Yahoo at two bucks a share and see it get filled. What this is telling the broker is, "I want to buy at this price. If the price ever hits this number, activate my order and buy it."
Limit orders are good because you can eliminate scalping. The problem with limit orders is that you're not necessarily going to get your order filled. The market could be moving very fast and you entered your price too low and missed. If you missed your entry, the order will still be active at the price, meaning if the market decides to swing back down, your order could be filled when it hits your price on the way to the bottom. Ouch.
If you don't get filled, you need to decide if you want to cancel your order or keep it in there.
Most traders use limit orders more than market orders because it allows traders more control in where they enter the market. Before you commit yourself to using limits, check with your broker about different commission costs. Ameritrade, for example, charges $8 for a market order, but $13 for a limit. Brokers also offer different guarantees about orders. At Datek Online, if your order is not filled within 60 seconds after becoming active, the commission is waived.
All these low costs and quick order fills have stemmed from the birth of online trading. What used to take a couple of minutes on a phone now takes a few seconds on the Net. If all this computer stuff is still not your cup of tea and you want some Wall Street bigwig like Goldman Sachs to yell at on the phone, don't bother looking around. If your pockets are deep enough, they'll be calling you.
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