Is Buying Stocks Online Safe?

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Why buy stocks online? It's often much cheaper than going through a traditional broker. How to make it safer too!

The primary goal of value investing is to buy shares of great companies at discounts to their true worth. For this to work you must also keep your costs low. By doing your own research—picking your own stocks—and learning to trade stocks on your own, you can avoid hidden investment fees and, in fact, improve your returns dramatically. These hidden fees may cost you hundreds of thousands of dollars over decades in lost returns!

How to Buy Stocks Online

Unless you're super wealthy already, there are only three ways to buy stocks online:

  1. Connect with other investors directly somehow.
  2. Buy shares directly from the companies themselves, if possible.
  3. Set up an online brokerage account

If you have a lot of time on your hands or a great network of people, you may be able to find buyers and sellers just by going out and looking for them outside of an official exchange (such as the NYSE). You call up your Uncle Milt in Canada and offer him $40 per share for a thousand shares of Coca-Cola and he may take you up on your offer. Taxes and accounting will be difficult, but if you've already gone to this much work, what's a little more?

Some companies have a direct stock purchase plan off of the public stock market. For example, you can buy stock directly from Coca-Cola—buying stocks online without a broker. You will pay some fees and you will probably have to meet maximum and minimum investment requirements, but this can be easier and cheaper than going through a brokerage. Unfortunately, not all companies offer this type of plan.

The most reliable and easiest way to buy stocks online is to open an account with a discount brokerage. A reputable brokerage allows you to buy and sell stocks, bonds, ETFs, et cetera online on your own. Generally you'll pay a fixed commission for any trade (between $4 and $10). You'll often be able to pay for more services, such as advanced research or recommendations, but you can treat your account almost like a bank.

This self-service investing allows you to set specific trade targets, such as "Buy me a thousand shares of KO when the price reaches $40 per share" and wait for the trade to execute and pay your commission.

Is Online Trading Safe?

Obviously there are risks with buying shares directly from other people. Maybe Uncle Milt is your favorite uncle and the most trustworthy person in all of Alberta, but what if you found someone on Craigslist willing to sell you Coca-Cola stock certificates for $20 a share? If that works, it's a bargain, but Craigslist is not a reputable market for stocks.

By the same logic, buying shares directly from the company is as safe as buying shares of that company; because Coca-Cola is well worth owning, its direct share purchase program is legitimate. On the other hand, Leeroy's Legendary Lemonade of Lubbock might not be quite as trustworthy.

To some degree, this trustworthy and neutrality makes a discount broker even more appealing. As long as you use a reputable firm that's been around for a while (and processes billions of transactions every year), you're likely to get something stable and usable. After all, they'd be liable for unimaginable damages if they did something wrong; they'd have the wrath of the US Government and SEC and equivalents in other countries after them.

... but keep in mind what you're really protecting against.

Risks of Online Investing

The risk of buying stocks isn't that you chose the wrong way to invest; it's obvious why buying stock certificates from an eBay seller is dangerous. The real risk of investing is buying the wrong thing, especially at the wrong price.

If you do a little research, you can find a good discount broker. For the most part, any of the big names is as good as any other. If the broker goes out of business and you lose everything, you have bigger problems—that probably means the global economic system has shut down and finding clean water is more important than checking stocks on your phone.

As long as they use proper encryption to protect your browser/app, charge a reasonable fee for trades, and have decent reviews, any of the big names will be fine. Don't put too much effort into it; don't spend all your time trying to find the perfect broker and never actually invest. To avoid the biggest risk of stockpicking, stick with what you understand, what will provide you with real wealth over time, and what's on sale for a good price right now.

Avoid the risk of letting someone else pick stocks for you, whether you buy into a mutual fund or you let your broker talk you into making trades for you. If you aren't the one deciding what to buy and sell and when to buy and sell—if you don't have a compelling story for why you're buying this particular stock right now—you're taking on way too much risk.

Buying stocks on your own can be safe if you approach investing the right way and take control of your money yourself. A discount broker can help, but the rest is up to you. When you are in control of your portfolio, choosing what and when and how to invest, you can craft your trades for your own purposes. That's a lot of power and you can wield it wisely.

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