Financial Securities and Real Estate
Legend has it that Joseph Kennedy sold all the stock he owned the day before "Black Thursday," the start of the catastrophic 1929 stock market crash. Many investors suffered enormous losses in the crash, which became one of the hallmarks of the Great Depression.
What made Kennedy sell? According to the story, he got a stock tip from a shoeshine boy. In the 1920s, the stock market was the realm of the rich and powerful. Kennedy thought that if a shoeshine boy could own stock, something must have gone terribly wrong.
Now, plenty of "common" people own stocks. Online trading has given anyone who has a computer, enough money to open an account and a reasonably good financial history the ability to invest in the market. You don't have to have a personal broker or a disposable fortune to do it, and most analysts agree that average people trading stock is no longer a sign of impending doom. The market has become more accessible, but that doesn't mean you should take online trading lightly.
Before you can trade stocks online, you have to select an online broker. Your online broker will execute your trades and store your money and stock in an account. The online trading industry has seen lots of mergers and acquisitions, but there are still many firms to choose from. Different firms also offer different levels of help, account types and other services. Here are some things you should keep in mind as you look for an online broker.
Choosing a Broker and Opening an Account
- How much money you plan to invest. Most firms require investors to have a certain amount of money to open an account. This is different from a minimum account balance -- although most brokerage firms have those, too.
- How frequently you plan to make trades. Are you going to buy one stock and hold on to it? If so, you'll need to make sure the brokerage doesn't charge a fee for account inactivity. On the other hand, if you're going to make lots of trades, you'll want a lower fee per trade. Regardless of how much you plan to use your account, you should evaluate how much using the site will cost you.
- Your level of trading experience and how much guidance you need. Some of the least expensive brokerage firms don't offer much in the way of research or broker-assisted trades. Others, while still moderately priced, offer market analysis, articles on successful trading and help from licensed brokers.
- Any other services you may want. A few trading sites let you buy and sell stocks online but not much else. Others are more like major banks, offering debit cards, mortgage loans and opportunities for other investments like bonds and futures.
Opening & Funding an Account
When you open an account with a United States online brokerage firm, you'll answer questions about your investment and financial history. These questions determine your suitability for the account you are requesting -- the brokerage firm 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. This helps the brokerage firm track and report your investments according to tax regulations and the PATRIOT Act.
In addition to providing this information, you must make several choices when you create an account. With most brokerage firms, you can chose between individual and joint accounts, just like at a bank. 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.
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 firm based on the equity of the stock you already own, using that stock as collateral. 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. In other words, if you want to purchase $5,000 worth of stock, the value of the cash and stock in your account must be at least $2,500. You can borrow the other $2,500 from the brokerage firm.
Once you have made your purchase, you must keep enough equity in your account, also called your equity percentage, to cover at least 25 percent of the securities you have purchased. Here's how the brokerage firm determines this number:
