Online Trading for Beginning Investors

With solid investments, you may amass hundreds of thousands, if not, millions of dollars in wealth over the long-term. As a beginning investor, online trading has effectively leveled the playing field between Wall Street professionals and your everyday Main Street world. Similar to any investment strategy, however, online trading does expose your bottom line to large losses. For success, you must first understand the basics of how trades are cleared.

Online Trading for Beginning Investors: Bid Versus Ask

Online trading combines with information technology to organize financial markets according to auction format. For each individual security, groups of buyers and sellers compete to close deals at the best prices. Prospective buyers post bids, while sellers set offering prices. Per the auction format, all trades clear at price points where the highest bidding and lowest offering prices intersect. To follow the price action, you can monitor the stock ticker through both the financial media and your online trading interface. Each individual security features a distinct ticker symbol for identification purposes. For ticker symbol information, you can either contact a corporation's investor relations department, or perform a search with the help of your online account.

Online Trading for Beginning Investors: Account Types

Online trading accounts are classified into cash and margin accounts. With a cash account, your buying power for acquiring investments is limited to the amount of money you deposit at the brokerage. With a margin account, however, you may borrow against your cash balance on a dollar-for-dollar basis to purchase investments. For example, you could buy $10,000 worth of shares in total -- upon a $5,000 cash deposit and $5,000 interest-bearing margin loan. A margin account is also necessary to sell stock short. When you go short, you borrow shares from another investor and immediately sell them for cash. At a later date, you return to the market to buy back those same shares and repay the original stock loan.

As a smaller investor, you should begin trading through a cash account -- to limit your losses. With time and learned experience, you may consider investing through a margin account at a later date.

Online Trading for Beginning Investors: Trading Interface

Online trading accounts are associated with user-friendly interfaces. The home page will break down your account balances according to asset class and dollar amount. From the home page, you may navigate to a trading tab to buy and sell securities. After pulling up the trading interface, you will enter the proper ticker symbol and indicate the amount of the investment you wish to trade. As a beginner, you should buy and sell investments "at the market" to ensure that your trades clear. When you trade at the market, you simply accept current prices to deal securities. As your skills progress, you may experiment with stop and limit orders, which are designed to lock in certain prices to trade investments.

Online Trading for Beginning Investors: Record Keeping and Taxes

Your online trading account will automatically generate a confirmation statement after every transaction. In terms of account balances, you can click refresh to monitor this information in real time. Each month, you can review a brokerage statement that classifies your account activity into deposits, trading, and investment income. Investment income, in the form of dividend payments and interest income, adds to your cash balance.

Be advised that you will generally owe taxes on realized capital gains and investment income for the tax year that they occur within your online trading account. You realize capital gains when you sell an investment at a profit. At tax season, you will receive 1099 forms that document your trading activity and help you report the information to the IRS. As a long-term investor, you can put money into an Individual Retirement Account (IRA) through your online brokerage. With tax deferral, you will not owe taxes on capital gains or investment income as they manifest within your IRA. Be advised that you cannot pull money out of a retirement account until age 59 ½ -- without a 10 percent additional tax penalty.

Online Trading for Beginning Investors, Sources:

SEC: The Internet and On-Line Trading

IRS: Publication 550 - Investment Income and Expenses

IRS: Publication 590 - IRAs

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