How to Start Investing Online
You don’t have to be the Wolf of Wall Street to make money on the stock market. In fact, you don’t even have to leave your couch. These days there are plenty of online stock brokers that make investing safe, easy, and accessible to just about everyone.
But how do you know when it’s time to start investing? Are stocks the right addition to your financial portfolio? And when you are ready, how do you choose the right online broker and make investments that will actually see returns?
To answer these questions, we spoke with seasoned traders, market researchers, investment advisors, authors, and a professor of finance. Their advice boiled down to a few key points, which we’ll talk about in greater detail below.
Quick Tips for Investing
#1 – Anyone can invest in the stock market, but you should put money into retirement and traditional savings accounts first.
#2 – Most people will see better returns from investing in a broad, low-fee index fund than from trying to play the stock market day-to-day.
#3 – If you do plan to trade individual stocks, start small and do your own research. Don’t blindly follow the advice of pundits or famous investors.
Should I invest in the stock market?
Deciding when (or how much) to invest depends on your personal financial goals.
Maybe you’ve maxed out 401 (K) contributions, and now you’re looking for a secondary savings channel. Maybe you have big day trading aspirations and need a platform to get started on. Maybe you just want to invest some pocket change and watch it grow.
Here’s the good news: Pretty much anyone can buy and trade stocks. There’s no hard-and-fast rule about how much money you need to invest or how large your portfolio should be.
“From a financial perspective: If you have disposable income, you’re ready. From a personal perspective: If you have the time and the willingness to learn, you’re ready.” -Don FishbackAuthor, Options for Beginners
Start with a well-rounded budget. Your first priority should be to cover the essentials: housing and living expenses, retirement savings, and emergency funds in a secure bank account. As Fishback puts it, you should only be investing “money above and beyond what it takes to sustain a reasonably prudent lifestyle.”
Is online stock trading safe?
Yes — As long as you choose an established, reputable online broker.
If you’re worried about handing your accounts over to an online broker, you’re not alone. It may seem like a risky move to entrust account details and other financial information to a website — especially robo-advisors like Betterment or Wealthfront“, which move your money around for you.
Fortunately, most online brokers go to great lengths to secure their users’ financial information. The trick is choosing a service with sound credentials and a clean track record. Stacy Caprio of fiscalnerd.com recommends looking for “someone who highlights positive reviews on their site and can offer referrals,” and avoiding newcomers that haven’t been vetted yet.
“Online stock trading is safe as long as you choose a reputable platform to do it through. Some of the newer “Crypto” investing platforms have been taking people’s money then shutting down, so you do have to be careful.”Stacy CaprioBlogger, Fiscal Nerd at fiscalnerd.com
When you’re comparing stock trading platforms, look for the “security” section on their websites. Companies that have taken stringent measures to protect your data will be sure to tell you about it. Be wary of any platform that’s vague or totally silent about its security protocols.
Is online stock trading worth it?
The best way to turn a profit isn’t by day trading, but by playing the long game.
It may sound silly, but The Wolf of Wall Street changed the way many people view the stock market. After the movie’s release in 2013, self-made millionaires started coming out of the woodwork (primarily on social media). Their message? That trading stocks is a way to escape the nine-to-five “rat race” and live the life you’ve always wanted.
It’s a tempting offer. (We’d like to make a couple trades and then sit back in our rooftop hot tub, too.) But the fact of the matter is, playing the stock market is almost always a losing game. This was proven in a 2017 study by Hendrik Bessembinder, a professor at Arizona State University’s W.P. Carey School of Business. His research offers a few key findings in support of passive investing:
- Since 1926, only four percent of stocks have generated higher returns than an average Treasury bill.
- All wealth creation in the stock market since 1926 can be attributed to four percent of top-performing stocks (meaning 96% of individually traded stocks generate no net returns).
- More than half of all stocks in the CRSP (Center for Research in Security Prices) database deliver negative lifetime returns.
Social media-famous investors like @timothysykes promote the idea that day trading can fast-track you out of your 9-to-5 and into the lap of luxury.
Bessembinder’s research shows that the vast majority of people who buy and trade individual stocks won’t profit. In other words: The day trader, jetsetter, hot-tubber lifestyle you see on Instagram is more or less a myth.
This is why the experts we spoke with universally recommend a conservative approach to investing. They advocate for putting your cash into low-risk, diverse index funds rather than trading individual stocks with the hope that you’ll strike gold.
“Too many people believe that successful investing necessarily involves continuously making trades in response to the latest economic and political developments. [In fact], buying an individual stock is subject to tremendous risk. The best thing for a novice investor is to invest in a low fee, broadly diversified stock market index fund.”Robert R. Johnson, PhD, CFA, CAIAProfessor of Finance, Heider College of Business at Creighton University
Johnson recommends starting with a tried-and-true investment option like the Vanguard Total Stock Market Index Fund. Funds like this one spread your money across a wide range of stocks. That way, your investment is protected if a single stock or group of stocks suddenly drops in value.
“Trying to pick winning stocks is a losers game,” says Johnson. “The returns on the market have largely been driven by a small percentage of big winners. The solution is to invest in diversified funds so you don’t need to pick those winners.”
How do I trade stocks online?
If you’re set on trading stocks, there are a few things you’ll want to keep in mind.
Like we said: The majority of experts recommend passive investing as opposed to active trading. If you do want to try your hand at buying and selling individual stocks, though, there are a few key pieces of advice to keep in mind:
Follow the five percent rule
“Allocate no more than five percent of your portfolio to personal trading,” says Reinkensmeyer, “and invest the rest in low cost index funds.” This strategy will protect the majority of your investments from market volatility, while leaving you a little room for play.
Start small — very small
Pete Garner, finance writer and veteran trader of more than 20 years, says “the most common mistake a new trader can make is opening a trade bigger than they should.” His advice? “Start with a trade so small that when it goes to zero, it does not matter. Target making $1 in the first week, $2 in the second week, and so on. Be happy with accumulating small wins.”
Do your own research
“The second most common mistake a trader can make,” continues Garner, “is following someone else on a social network and trying to trade the same way they do.”
Johnson offers a similar piece of wisdom: “Investors are much better off ignoring the short-term trading advice (in fact, not tuning in to the 24/7 financial news at all) and adhering to a simple, long-term strategy.”
This goes for social media as well as mainstream news outlets. If you’re going to buy stocks, you should study up on the companies you’re investing in and make all your own decisions.
“With enough insider information and one million dollars, you can go broke in a year.”Warren Buffett
Returns are never guaranteed, but you’re better off making an informed investment than following the advice of a pundit and crossing your fingers. Some of the best online trading platforms offer learning materials and in-house research to help you along the way — we’ll cover those next.
Which online stock broker is best for beginners?
Choosing the right platform will help you make smarter investments.
The best online brokers have a lot to offer: with the right platform and educational resources, they’ll help you grow your skill set and your portfolio. We did an in-depth review of the best online stock brokers, and the nitty-gritty is that it’s easy to find a great broker if you look for three key features.
1. “The first and most important [quality] is a user-friendly website and platform.”Blain ReinkensmeyerHead of Broker Research, StockBrokers.com
Or as Pete Garner puts it, “Trading should be fun and easy. When it becomes complicated it becomes a distraction.”
Explore a few different sites before signing up for a broker account. It’s fairly easy to tell which ones are beginner-friendly based on the quality of their learning materials and the level of financial-speak used on their site.
Our favorite investing site for beginners is Etrade. This education-focused platform includes how-to videos, articles, and webinars for every level of investor. It also has a variety of support channels — from phone and email to online chat — so if you have questions, you can talk to a rep in a way you’re comfortable with.
2. “A low-fee fund is [also] essential, as that means more of the investor’s hard-earned cash is being put to work.”Robert R. Johnson, PhD, CFA, CAIAProfessor of Finance, Heider College of Business at Creighton University
Fees, like investments, need to be considered in the long-term. Account maintenance and broker fees may seem miniscule at face value (a few dollars here or there), but those dollars add up. “Just as stock market returns compound over time,” says Johnson, “the deleterious effects of high fees also compound over time.”
Look for online brokers with low (or no) yearly maintenance fees, and no extra charges to access data, research, or trading tools. We recommend starting with Ally Invest or Etrade: Neither charge commission on self-directed trades or require minimum balance requirements, so you don’t have to invest a lot of cash to get started.
3. “A robust offering of educational content [and] access to quality research are crucial.”Blain ReinkensmeyerHead of Broker Research, StockBrokers.com
The best online brokers will help you make successful investments by providing educational resources and expert insight. That way, you don’t have to dig around on the web for quality investing advice — you can do your research and make your trades all in one place.
Reinkensmeyer recommends looking for a site that offers “market commentary, analysis, and education from in-house professionals.” Some of his favorites? Fidelity’s Fidelity Viewpoints newsletter and Charles Schwab’s Schwab Investing Insights newsletter.
The Bottom Line
In the words of Blain Reinkensmeyer: “Passive indexing is the best path forward for 99.9% of Americans.” If you’re ready to start investing, start with a diversified index fund that will offer slow but secure growth over time. Our experts recommend Vanguard for its low initial investment requirements and miniscule fees.
“Patience. Wealth accumulation does not happen overnight. Warren Buffett’s returns have averaged 24% per year. After one year, $1,000 is only up to $1,240. But after 33 years, it’s up to $1,210,362.”Don FishbackAuthor, Options for Beginners
Those that are set on stock trading should stick to a few key tenets: Invest no more than five percent of your portfolio in individual stocks, start with a very small initial buy-in, and do lots of research before buying. It’s also important to choose a trading platform with clear security protocols, an easy-to-use interface, and great learning materials. Check out our best online stock brokers for more guidance on this topic.