Is Buying Stocks Online Safe?

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Buying stocks online is safe, if you're smart--and cheaper than a traditional brokerage.

The primary goal of value investing is to buy shares of great companies at discounts to their true worth. This is how you can grow wealth by investing in stocks.

This works a lot better if you 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. The less you pay, the better your returns. These hidden fees may cost you hundreds of thousands of dollars over decades in lost profits!

How to Buy Stocks Online

You can buy stocks online in one of three ways:

  1. Connect with other investors directly somehow.
  2. Buy shares directly from the companies themselves, if possible.
  3. Use an online discount broker.

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?

A direct stock purchase plan allows you to buy stocks directly from the company. For example, you can buy KO stock from Coca-Cola itself—no broker needed. You'll have to sign up and pay some fees, 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 a brokerage account with a discount brokerage. A reputable brokerage allows you to buy and sell stocks, bonds, ETFs, et cetera online on your own. You don't have to be a licensed broker for this; just someone willing to do a little bit of research.

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. Just like everything else, technology is making it easier to invest than ever.

Generally you'll pay any where from $0 per simple trade to $4. (Never pay more than $10.) You can pay for additional services, such as advanced research, personal recommendations, real-time option trading, and the direct assistance of a stockbroker, but otherwise your account will behave almost like an online bank.

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.

This trustworthiness 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 Discount Brokers 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.

A reputable online broker will:

  • Use proper encryption to protect your browser/app
  • Charge a reasonable fee for trades (minimal for simple buying and selling, slightly more for complex transactions)
  • Require verification that you really want to trade options
  • Have a good working relationship with the SEC
  • Provide timely statements and tax documentation
  • Have good reviews from other investors
  • Allow you to perform self-directed investing

Of course, as an individual investor, you're may run into market data delayed by anywhere from 5 to 15 minutes. In other words, you're not always getting the latest trade information as soon as it happens. (You're probably used to this if you use anonymous stock feeds such as Google or Yahoo Finance.)

Don't put too much effort into finding the best discount broker; pick one that you're willing to work with. Your biggest risk isn't legitimacy. It's investing in the wrong thing (or not investing at all).

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.

A full-service broker can seem comforting, but allowing someone else to purchase securities on your behalf requires you to give up the control and care you bring to your own portfolio. 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—and succeed at your own goals.

Buying stocks on your own can be safe if you approach investing the right way and take control of your money yourself.

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