Your friend just called you, and she wants to tell you that she just made 25% on her portfolio.
You want to do the same thing but don’t know where to start. The biggest problem here is the
lack of information and not knowing how it works.
I will try to explain here so you can make your own decisions without relying on anyone else. Who knows if they are providing objective advice?
Trading accounts
First of all, you need an account at a brokerage firm like Saxo. Click for more info here. You choose which one fits better for your region/language. One good thing about these places is that you can do it in less than an hour if you want to go all-in.
The first thing is to sign up and link your bank account. You will send money from your savings or checking account, whichever has the highest limit (for example, 5000$). This number varies depending on where you come from, but usually, if your salary is high enough, you should use one of these two types of accounts.
If you are already working, I suggest you open another bank account for this particular purpose called ‘stock market’. It will help you avoid spending extra money out of temptation because, essentially, what we are doing here is gambling. Hence, having two separate bank accounts helps psychologically.
If you want to start investing and don’t have money in your bank account, you can borrow from a family member or friend. This is called ‘margin trading’. But this should be considered as a last resort because the interest rates will make it more expensive than using your own money.
Once you are done with this step, log into your brokerage firm’s website and click on the link for new accounts.
Here you choose which stock market exchange you want to trade (SP500, NASDAQ, …). Then depending on what kind of trader you are, there are different types of accounts they offer IRA (Individual Retirement Account), Regular Trading account, etc.
IRA Account
The IRA is a more long term investment account. In this case, it means that if you want to buy 100 stocks, they can’t be traded within one year. This is on purpose because the goal of an IRA is for your money to grow with time so you can retire on it someday. The Regular Trading account, on the other hand, the Regular Trading account allows you to trade immediately once you buy a stock.
Regular Trading Account
If your goal is to swing trade (buy and sell within a few days/weeks), then go for Regular Trading; otherwise, open IRA after you have enough capital to reduce the risk of being wiped out from trading too much at the beginning, which usually happens when people start playing with real money.
Making an investment
Assuming that we are going with a standard trading account type. In the next step, they will ask you how much money do you want to invest (minimum is usually 500$) and how many shares:
You choose, for example, 100 stocks at $5/each, which makes your total amount invested 5000$. The price of one share can be found on Google Finance, Yahoo finance or any other financial website.
The above window shows that even if the market goes down (for example -2%), your money won’t decrease that much because although you bought for 5000$, the average price per stock was 4.9$. If it went up 2%, then your portfolio gained 1000$. This becomes more significant when talking about hundreds and thousands of dollars in play!
Commissions
On the other hand, you got to pay attention to commissions. Commissions are small fees that your brokerage charges when doing transactions, i.e. buying or selling a stock. These fees vary depending on which broker/dealer you use. It can be anywhere from $1-$10 but usually around $5 is an average price.
So 100 stocks bought at 5$ commission will cost you 500$ in total. This is why it’s called ‘paying for your order’. As shown above, some e-brokers has a promotion where they charge 1 cent per share up to 1000$, so if you do more than 10 000$ worth of investment, the commission rate will go down to zero! That means that instead of 5000$, your order would only cost you 500$.