Online investing: How to get started

The safe way to double your money is to fold it over once and put it in your pocket.

~ Frank Hubbard

Last week a reader asked a question about how to get started with online investing in Canada. I directed her to The Globe and Mail’s online brokerage review for details about the offerings of individual brokerages. I said I would try to write about some general issues to consider too, so here goes:

What type of account will you open?

Do you want to open an RRSP, RESP, TFSA, or just a regular brokerage account? Most of the larger brokerages will offer all of these but double-check to make sure the broker you’re considering offers the products you need. Make sure you check out the fee structure for each type of account as well. Some brokerages will charge annual fees for RRSPs or RESPs but some offer them for free.

Do you want to trade on margin or cash only? Trading on margin is basically borrowing money to invest. I don’t recommend it unless you’re a professional. If you trade on margin, you will incur interest charges and it’s possible to lose more than 100% of your money.

Where will you invest your money?

Do you want to invest in mutual funds, ETFs, individual stocks, bonds, or a combination of all of these? Some brokerages do not charge a trading fee to buy or sell mutual funds as long as you leave the money there for a minimum period of time. Some will charge higher commissions in the neighborhood of $30 to buy or sell mutual funds.

Trading costs for stocks and ETFs are usually the same. ETFs (Exchange Traded Funds) are just groups of stocks or bonds that trade under a single ticker symbol and can be bought and sold like an individual stock. Costs per stock trade can range from $4.95 to $30 or much higher if you are using a full-service broker as opposed to an online discount broker.

Learn and practice first

Many online brokerages will offer paper trading accounts that allow you to practice trading with fake money before you put your hard-earned cash on the line. This is a great idea as it helps you learn the ins and outs of the trading platform that you’ll be using, and it gives you some practice with decision-making.

Even if your broker doesn’t offer a paper trading account, you can (and probably should) trade on paper yourself for a while before you dive in, especially if you are new to investing. Write down possible buy and sell points and see how your trades perform. But beware: humans do behave differently when real money is on the line. Take it slowly once you start investing real cash even if you’ve been practicing for a while.

Order entry

Most brokerages will offer a variety of trading platforms from basic web-based quotes and order entry to the state of the art downloadable trading cockpits with real-time streaming quotes, charts, and all the bells and whistles. The latter usually involves a monthly data fee or a minimum trading requirement. If you’re just starting, stick to the basic free interface.

When you place an order, you will need to enter the symbol of the stock or fund that you want to buy. If you’re investing in Canadian securities, you may need to enter a .to or -t after the symbol. It varies by platform. There’s usually a “symbol lookup” button you can press to get the information you need.

You’ll need to know the quantity of the security you wish to purchase. For stocks or ETFs, that means the number of shares. For mutual funds, you can usually enter a number of shares or a dollar amount.

You’ll also need to decide whether you will use a market order or a limit order . I’ve read books that tell you to always use market orders. I’ve read other books that tell you to always use limit orders. If you enter a market order, you get the price that the stock is trading at when the order is executed. If you use limit orders, you choose a price and your order is filled when and if the market hits that price. I never used anything but limit orders when I was trading.

One more item to enter is the duration of the order. You can set the expiration for “day”, which means that it will expire at the end of that trading day. Alternatively, you can usually choose a date on which you want the order to expire. You can sometimes select an “All or None” option that means that your order will not be filled unless you can buy or sell all of the shares you wanted (ie. no partial fills).

Order execution

Once your order has been filled, you can usually view it in an “executions” section of your platform. Some platforms allow you to select an option whereby you’ll be sent an email when a trade has been executed. Sometimes you will only get a partial fill, so be prepared for that. If you placed an order for 400 shares of XYZ and you receive a partial fill for 200 shares, you may still get the other 200 shares later the same day. You will usually only be charged a single trading commission when this happens.

Have a plan and a strategy

As with any other area of finance, having a plan is key. You need to know what type of investing you will be doing. Will you be executing swing trades that last a few days, or long-term investments that last months or even years? It’s crucial that you know what your strategy is for each trade. Write it down and stick to it.

If you are just starting out, I would recommend that you limit the amount of money you put at risk until you become more comfortable with investing. Like anything else, you’ll need some time to try out different strategies and find the ones that work best for you.

As I mentioned in Should You Invest in Stocks? you need to have some type of exit strategy. Whether you are trading short term or investing for the long haul, you need to have a written plan that you can execute under various scenarios. How will you react if your position drops by 5%? What about 10% or more? Will, you set a stop loss at a given price level or time frame? At what level will you take profits or rebalance your portfolio?

There is more to know about online investing than I could ever include in a single post, but I hope this will help you get started if you’re interested in going that route. Things have been pretty volatile in the markets over the past couple of years, so tread carefully and take your time. There’s no rush to invest right now as the markets have experienced a huge bounce-back already.

Do you have any questions or comments about online investing?