Most adults buy their stocks through a broker, a traditional route of investing in the stock market. There are three different kinds of brokerage firms:
Full service brokers
All act as agents for buying and selling stocks, bonds, and mutual funds, and are all regulated by the same security rules governed by the Securities and Exchange Commission (SEC).
The difference is that the full-service brokers like Merrill Lynch and Paine Webber charge higher commissions ($100 or more as a minimum charge) than the discount brokers such as Charles Schwab ($30 minimum). The deep-discount brokers, like E*Trade, Lombard, and eBroker, charge flat fees, ranging from $12-$15, for each order. The higher fees you pay to Mr. Merrill, Mr. Lynch, Mr. Paine, or Mr. Webber entitle you to get investment advice and research reports. You dont get that from the discount brokers. Click here for more information about US brokerage firms.
If you know what stock you want to buy, discount brokers are the way to go. Click here for more information about the National Discount Brokers.
Here is the catch 21: Unless you are older than twenty-one (18 in some states), you cant open your own account. You need to set up an account with a parent or a guardian who can act as your "custodian." Doing this is like driving with a permit. You control the car, but theres an adult by your side to remind you not to speed.There are two ways you can buy stocks from a broker.
Buy stock at market price
With the first way, you can buy a share of Coke
at market price, currently $45 a share. With the other way, you put in a thirty-day
"limit order" at $40. (Both with your broker) With the limit order, you hope to
buy Coke for $40 per share. You may or may not get to buy shares of Coke for $40,
depending on Coke's price in the next thirty days, and your thirty-day "limit
order" will expire after thirty days if Coke never comes down to $40. Nevertheless,
if the share price of Coke drops to $40 or below within the thirty days after you place
your order, your broker will fill your order at $40 a share or less.
Until recently, young investors have been discouraged from buying one share or a few shares of stock. There are two barriers: First, stockbrokers who handle most stock transactions, open accounts for only those 21 or older. Second, stockbrokers charge minimum commissions ranging from $12 to $40. If you buy one share of Coke for $45, and you have to pay a $40 commission, you have to pay $85 for a $45 stock. No successful investors can afford that.
Nowadays, however, over one hundred companies have a direct investment plan through which you can buy a few shares and pay lower commissions than through the deepest discount stockbrokers; sometimes, you pay no commissions at all.
Direct investment plan is the best thing Wall Street has done for young investors since its establishment. Companies such as McDonald's, Wal Mart, Sony, and Home Depot will allow you to buy shares without paying a brokers commission. Moreover, over 900 companies offer dividend reinvestment plans (DRIP), in which shareholders can purchase additional stock without fees.
At this point, you should start investing in the stock market with even a little money.