Investing in stocks is simple as more companies have simplified the process and allow beginners to open an account through a website or mobile app.Common stocks allow stockholders to vote on company issues, but most of the time stockholders receive one vote per share. Several companies also give stockholders dividend payouts – these payouts typically change based on the company's profitability. Adding stocks in a portfolio means that you own a small percentage of a company that should increase its growth and value. Beginning investors should note there are two ways to make money from stocks: dividend payments and selling stocks when the share price goes up.How to Invest in StocksInvesting in stocks can be done in many ways. If you would like to form a strategy and manage your own investments, you can open a brokerage account. If you're unsure about where to start, consider opening an account with a robo advisor who will do the work at a lower cost. For those who want more guidance about their retirement plans, turning to financial advisors might be a good solution.For beginners who do not want to do the legwork in managing their portfolio or who are new to investing, a robo advisor could be a great first step, says Rick Swope, vice president of investor education at E-Trade, a New York-based brokerage.The portfolios managed by robo advisors typically consist of exchange-traded funds aligned to an investor's goals, risk tolerance and time horizon. ETFs also provide diversification at a lower cost."Young investors who are just starting out should look to simple solutions like robos and when investors graduate to more complex financial needs, like estate planning, they may turn to the services that a financial advisor can provide," he says.The number of companies offering brokerage accounts has increased, including banks such as Ally Bank. Some brokerage companies provide a simplified version such as Robinhood where investors can buy and sell stocks, ETFs, options and cryptocurrency from a mobile app for free. Although Robinhood doesn't offer trade options for mutual funds or foreign stocks. Stocks can also be purchased in individual retirement accounts such as a traditional or a Roth IRA. This allows investors to grow their retirement money in a tax-deferred account.Competition has spurred many brokerages to slash commission fees, which can add up quickly if you buy and sell stocks, mutual funds or ETFs frequently. Robinhood is not the only company that does not charge commission fees. Starting in October, Interactive Brokers is providing an unlimited number of commission-free trades on U.S. exchange-traded stocks and ETFs along with no account minimums or inactivity fees."Investing has become much easier," says Steve Sanders, executive vice president of marketing and new product development at Greenwich, Connecticut-based Interactive Brokers. "More of your hard-earned money will go straight toward your portfolio and not toward paying fees. I think this will be extremely helpful for beginning investors as well as others who like to save money."How Much Money Should You Invest in the Stock Market?Since many brokerages such as TD Ameritrade do not require a minimum amount to open a trading account, you can start investing with even $100.Discount brokers are a boon for beginners with little money, who are looking to get stock market exposure with smaller portfolios. But a discount broker does not typically provide advice or analysis. Many of these brokers do not require a minimum amount to start an account while some have a low beginning threshold of $1,000. Building a diversified portfolio is the priority for beginners who should consider adding index funds that capture the broader market, Swope says. Mutual funds and ETFs are the easiest solutions since they own hundreds to thousands of stocks and are less volatile than individual stocks. ETFs tend to have low minimums, allowing investors to spread their first $10,000 between a few funds and gain access to a variety of areas in the market, he says."A mix of ETFs, mutual funds and individual stocks can provide even broader diversification between investment vehicles," Swope says. "Bottom line: If you're just getting started, keep it simple."Good Stocks to Invest in for BeginnersChoosing the right stock can be a fool's errand, but investing in high-quality stocks such as blue chips and dividend-yielding ones are often good strategies. One reason investors opt for blue chips is because of the potential for growth and stability and because they produce dividends – these include companies such as Microsoft (ticker: MSFT), Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Coco-Cola, for example, generates a dividend of 2.9%, and the stock is less volatile as its share price has hovered between $44 and $55 during the past 52 weeks. Dividends can generate much-needed income for investors, especially higher-dividend ones.Another thing for beginners to consider is diversification. Diversifying your stocks and not concentrating on one sector is another advantage. One other tip is to be consistent. An investor's best bet is to invest consistently such as socking away $400 a month.The habit of saving and putting away money regularly is the single biggest decision "young people can make to ensure a good life down the road," says Ron McCoy, president and CEO of Florida-based Freedom Capital Advisors. Automatic investing can help remove the need to make decisions about when and how much to invest, creating consistent investing habits, Swope says. Automatic investing takes advantage of dollar-cost averaging, which often mitigates portfolio volatility over several decades."Instead of investing a lump sum all at once, investments are made incrementally with the same amount at regular intervals on a fixed and automatic schedule," he says.Dollar-cost averaging is a great way to accumulate long-term wealth because you are always the same number of shares which can be beneficial if you're buying during a downtown and paying a lower price before the stock rebounds, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors."This strategy also helps remove emotion because you're systematically investing in a long-term plan," he says.The news cycle about a company's stock performance can be overwhelming. Instead, remove the short-term noise, so you can maintain perspective of your strategy for the long run, experts say."The secret with investing is to remove emotion," Osmond says. "When emotion is removed from the equation, an investor is less likely to sell and buy at the most inopportune times."Billionaire Warren Buffett, a legendary investor, advises people to buy and hold stocks for several decades instead of selling and re-buying them constantly. At a minimum, the stock should be one that an investor would own for at least 10 years, he advises.
IRAs
More firms are announcing free trade options.
Major brokerages such as Interactive Brokers, Charles Schwab and E-Trade, among others, recently announced that they would stop charging commissions to their clients who trade stocks and exchange-traded funds. Anytime people can pay less or nothing to invest, it helps them boost returns by keeping more money. Market watchers say brokerage houses' decision to drop certain trading fees is part of a trend of lower investment costs in general over the years such as falling expense ratios. But brokerages aren't offering free trading services because they're altruistic. These companies are fending off competition from newer online brokerages. Here are eight facts you should know about free trades.
Brokerage firms are looking to retain clients.
Scott Coyle, CEO of Click IPO, which allows investors to buy individual initial public offerings, says these bigger firms likely made the move to retain clients as they may have seen customers transfer to newer platforms like Robinhood, which has been offering free trades for about seven years. If the more established brokerage firms see less attrition in their customer base, they not only keep those customers but can now recruit newer customers with the added lure of free trading. "These broker dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do," he says.
Mutual funds are not included.
The brokerage firms touting their free stock and exchange-traded fund trades were silent about mutual funds. That’s because mutual funds aren’t part of the no-commission deal, says Kevin Dorwin, managing principal at wealth management firm Bingham, Osborn & Scarborough. “Mutual funds, for the most part, are still priced much higher because they're harder for the brokerages to administer. And I think a lot of people use mutual funds, so they're not really saving on that at this point,” he says. Fees vary widely by brokerages and the type of mutual fund but they can cost between $20 to $40 to trade. Many brokerage houses are also allowing people to trade options commission-free, although option traders may still need to pay a fee of 65 cents per contract.
The average investor may not save much money.
Trading fees and expense ratios for stocks, ETFs and options have dropped over the past several years, which benefits investors overall. The trend of lower expense ratios for ETFs and mutual funds has helped average investors. But this move by brokerage houses to eliminate trading commissions may not save the average person who doesn’t trade a lot, Dorwin says. “Most ordinary people don't trade so much for that to be a huge benefit. The people who do truly win are those who trade frequently, and that's not always a great strategy for individual investors,” he says.
Free stuff isn’t always a good thing.
Todd Rosenbluth, director of ETF research at CFRA Research, says if people don’t have to pay a commission to trade, it could entice more trading. “The key takeaway to me is just because something is unlimited, it doesn’t mean that investors should take full advantage of it,” he says. The downside to no-cost trading may mean people will trade more than they do now, which means they could be moving in and out of the market and trying to make short-term calls because there’s no cost to do so. “It’s a lot harder to time the market and you’re a lot better off having time in the market,” he says.
Brokerages make money in other ways.
Jim Besaw, principal and chief investment officer at GenTrust, says it was easy for brokerages to offer free trading since the money earned on commission by many of the custodians wasn’t a large portion of revenue. They make more money on other services, he says. Payment for order flow, which is the pay that firms receive for directing orders to different parties to execute trades, can generate revenue particularly in low-liquidity markets, he says. Firms also make money on securities lending programs, when investors loan stock to other traders who want to sell short the security. Investors and brokers are supposed to split the revenue earned, but the divide isn’t always clear. These money-generating activities are fine. But Besaw says it’s not easy for customers to easily figure out these costs as some brokerages are less transparent than others.
Watch cash sweep accounts.
Besaw says cash sweep accounts, which is where brokerages deposit investor cash until investors deploy it into another investment vehicle, are a top money-generator for firms. That’s because firms often pay low interest rates on these cash deposits or move these funds into a in-house money market mutual fund, with a high expense ratio. “In many cases, that’s a much higher number than the other fees,” he says. “If a client has 5% or 10% of their money in cash, in many cases, the custodian's paying them 1% less than they should. So the custodians really making 1% on that 10%, which is 10 basis points, which are pretty big numbers.” Investors can avoid this by not letting their money sit long in a cash sweep account.
Investors may make better fund choices.
Before eliminating trading fees, some brokerages had a list of ETFs they offered for no-commission trading and Rosenbluth says fee-conscious investors often gravitated to those without considering other investing aspects. “Now the whole universe is open,” he says. Investors can now sort through ETFs based on expense ratios, liquidity, performance and other factors without being influenced by trading fees associated with the funds. It may also encourage better portfolio maintenance. Investors who use a broadly diversified strategy with five or six ETFs might be more likely to rebalance that portfolio regularly because there isn't a cost to buy and sell those positions, he says.
Investors may be less likely to liquidate accounts.
Rosenbluth says he’s heard discussions that axing trading fees may increase demand for highly liquid, ultra-short-term bond ETFs during volatile times. These ETFs have maturity and duration of less than one year, such as iShares Short Treasury Bond ETF (ticker: SHV), which has a yield of 2% and an expense ratio of 0.15%, a cost of $15 for every $10,000 invested. With no trading fees, investors could move to these safer ETFs, rather than liquidate all their holdings and stuff it in a low-interest bank savings account. Investors may return to the stock market quicker when they feel like taking more risks since there’s no cost to trade, he says.
Facts about no-commission trading:
Brokerage firms are looking to retain clients.Mutual funds are not included.The average investor may not save much money.Free stuff isn’t always a good thing.Brokerages make money in other ways.Watch cash sweep accounts.Investors may make better fund choices.Investors may be less likely to liquidate accounts.
More firms are announcing free trade options.
Major brokerages such as Interactive Brokers, Charles Schwab and E-Trade, among others, recently announced that they would stop charging commissions to their clients who trade stocks and exchange-traded funds. Anytime people can pay less or nothing to invest, it helps them boost returns by keeping more money. Market watchers say brokerage houses' decision to drop certain trading fees is part of a trend of lower investment costs in general over the years such as falling expense ratios. But brokerages aren't offering free trading services because they're altruistic. These companies are fending off competition from newer online brokerages. Here are eight facts you should know about free trades.
Brokerage firms are looking to retain clients.
Scott Coyle, CEO of Click IPO, which allows investors to buy individual initial public offerings, says these bigger firms likely made the move to retain clients as they may have seen customers transfer to newer platforms like Robinhood, which has been offering free trades for about seven years. If the more established brokerage firms see less attrition in their customer base, they not only keep those customers but can now recruit newer customers with the added lure of free trading. "These broker dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do," he says.
Mutual funds are not included.
The brokerage firms touting their free stock and exchange-traded fund trades were silent about mutual funds. That’s because mutual funds aren’t part of the no-commission deal, says Kevin Dorwin, managing principal at wealth management firm Bingham, Osborn & Scarborough. “Mutual funds, for the most part, are still priced much higher because they're harder for the brokerages to administer. And I think a lot of people use mutual funds, so they're not really saving on that at this point,” he says. Fees vary widely by brokerages and the type of mutual fund but they can cost between $20 to $40 to trade. Many brokerage houses are also allowing people to trade options commission-free, although option traders may still need to pay a fee of 65 cents per contract.
The average investor may not save much money.
Trading fees and expense ratios for stocks, ETFs and options have dropped over the past several years, which benefits investors overall. The trend of lower expense ratios for ETFs and mutual funds has helped average investors. But this move by brokerage houses to eliminate trading commissions may not save the average person who doesn’t trade a lot, Dorwin says. “Most ordinary people don't trade so much for that to be a huge benefit. The people who do truly win are those who trade frequently, and that's not always a great strategy for individual investors,” he says.
Free stuff isn’t always a good thing.
Todd Rosenbluth, director of ETF research at CFRA Research, says if people don’t have to pay a commission to trade, it could entice more trading. “The key takeaway to me is just because something is unlimited, it doesn’t mean that investors should take full advantage of it,” he says. The downside to no-cost trading may mean people will trade more than they do now, which means they could be moving in and out of the market and trying to make short-term calls because there’s no cost to do so. “It’s a lot harder to time the market and you’re a lot better off having time in the market,” he says.
Brokerages make money in other ways.
Jim Besaw, principal and chief investment officer at GenTrust, says it was easy for brokerages to offer free trading since the money earned on commission by many of the custodians wasn’t a large portion of revenue. They make more money on other services, he says. Payment for order flow, which is the pay that firms receive for directing orders to different parties to execute trades, can generate revenue particularly in low-liquidity markets, he says. Firms also make money on securities lending programs, when investors loan stock to other traders who want to sell short the security. Investors and brokers are supposed to split the revenue earned, but the divide isn’t always clear. These money-generating activities are fine. But Besaw says it’s not easy for customers to easily figure out these costs as some brokerages are less transparent than others.
Watch cash sweep accounts.
Besaw says cash sweep accounts, which is where brokerages deposit investor cash until investors deploy it into another investment vehicle, are a top money-generator for firms. That’s because firms often pay low interest rates on these cash deposits or move these funds into a in-house money market mutual fund, with a high expense ratio. “In many cases, that’s a much higher number than the other fees,” he says. “If a client has 5% or 10% of their money in cash, in many cases, the custodian's paying them 1% less than they should. So the custodians really making 1% on that 10%, which is 10 basis points, which are pretty big numbers.” Investors can avoid this by not letting their money sit long in a cash sweep account.
Investors may make better fund choices.
Before eliminating trading fees, some brokerages had a list of ETFs they offered for no-commission trading and Rosenbluth says fee-conscious investors often gravitated to those without considering other investing aspects. “Now the whole universe is open,” he says. Investors can now sort through ETFs based on expense ratios, liquidity, performance and other factors without being influenced by trading fees associated with the funds. It may also encourage better portfolio maintenance. Investors who use a broadly diversified strategy with five or six ETFs might be more likely to rebalance that portfolio regularly because there isn't a cost to buy and sell those positions, he says.
Investors may be less likely to liquidate accounts.
Rosenbluth says he’s heard discussions that axing trading fees may increase demand for highly liquid, ultra-short-term bond ETFs during volatile times. These ETFs have maturity and duration of less than one year, such as iShares Short Treasury Bond ETF (ticker: SHV), which has a yield of 2% and an expense ratio of 0.15%, a cost of $15 for every $10,000 invested. With no trading fees, investors could move to these safer ETFs, rather than liquidate all their holdings and stuff it in a low-interest bank savings account. Investors may return to the stock market quicker when they feel like taking more risks since there’s no cost to trade, he says.
Facts about no-commission trading:
Brokerage firms are looking to retain clients.Mutual funds are not included.The average investor may not save much money.Free stuff isn’t always a good thing.Brokerages make money in other ways.Watch cash sweep accounts.Investors may make better fund choices.Investors may be less likely to liquidate accounts.