It’s never been easier to invest in the stock market. In Investing in Stocks for Beginners: How to Start Investing, you got a breakdown of the various ways to invest, from employer-provided options to online and traditional brokers. Now that you have the basics of investing in stocks for beginners down, it’s time to take an in-depth look at two of the most popular methods of online investing: robo-advisors and online brokers.
How Online Brokers Work
At one time, if you wanted to invest in the stock market, you needed to visit a stockbroker in a brick-and-mortar building. The internet broadened the meaning of the term “brokerage,” making it possible for investors to get started from the comfort of home.
Online brokers let you have a hand in building and managing your portfolio. You can typically get the help of an expert broker if you want, but you also have the option of managing everything yourself. This option can save you money on management fees, giving you more cash to put into your investments.
Read More: Can I Buy Stocks With 50 Dollars?
How Robo-Advisors Work
A robo-investor can take DIY investing to the next level. With robo-investing, the latest data science is used to create and manage portfolios. You oversee the portfolio, but the algorithms use reams of information to increase your chances of success.
Betterment Investing is a great example of how these platforms usually work. You’ll answer some initial questions about your investment goals and wait for recommendations. The recommendations will be tailored to the goals you input, and you can accept or reject them and continue to tweak them after your portfolio is in place.
Pitfalls of Online Brokers
It’s important to note that there are some disadvantages to trading online. The biggest of these is the expertise you’re giving up. Yes, you’re saving on fees, but you also are still learning. As a beginning investor, you may miss the advice you’d get from an in-person expert. It can also become addictive, over time, as the ease of online investing prompts you to continue to put money in.
There are some platforms that can help with that. Etrade, for instance, offers tools that can help you learn as you earn money. You might also consider a platform like Stash Invest, which issues a debit card that you can use to earn stocks. With every purchase, Stash puts money into your portfolio so that you’re investing without even thinking about it.
Pitfalls of Robo-Advisors
A robo-advisor can be great for combining years of expertise with a do-it-yourself business model. Yes, you’ll save on fees, but it’s important to note that robots aren’t humans. They take the information you offer and turn it into action, but an expert would be able to apply logic and reason to the data you’re providing.
An app like Robinhood might help you overcome robo-advisor limitations. Using your input, Robinhood sets up a portfolio for you, but you’re also equipped with the tools you need to oversee things. You can not only take a look at your portfolio at any time, but you can set up news and notifications that will help you stay informed so that you can take action when necessary.
Investing Using Online Brokers
Investing in stocks online isn’t all that different from giving your money to a broker you meet in person. The online stock trading experience you have depends largely on the platform you choose, but generally speaking, it will work like this:
- You’ll set up an account with an online broker like ETrade, Tradestation or TD Ameritrade. You’ll answer some questions about your goals and your investment timeline.
- After you’ve set up your account, you’ll need to fund it. This simply involves transferring funds from your bank account to your account with the online broker. You can do this by wire transfer or check.
- Research and monitor. Once you’ve learned more about various stock prices and their performance, you can make your first purchase.
- When buying a stock, you have two options: market order or limit order. With a market order, you buy the stock at the current market value. A limit order lets you set a price limit. If the price doesn’t reach your limit, the trade doesn’t execute.
- Once you’ve placed your order, your buy order is matched with a sell order. Depending on the site you’re using, that matching will either be done electronically or with a human broker.
- When the trade is finalized, you’ll see it on your dashboard, likely along with a ticker indicating its current performance.
Read More: Easy Stocks for Beginners
Investing Using Robo-Advisors
The setup part of signing up with a robo-advisor is similar to what you’ll experience with an online broker. Here’s what you can expect if you’ve chosen to invest with a robo-advisor:
- You’ll either download an app or go to the website of your chosen service, then go through the setup process. You’ll be asked questions about your investment goals and your investment timeline.
- Once your account is set up, you’ll fund it. You can do this by transferring some money from your bank account to the app. Often these services make it easy to connect to the most popular bank accounts for these transfers.
- Even with a robo-advisor, you’ll have control over your portfolio. The app will help you build it, but you’ll ultimately be able to add stocks, remove stocks and put more money into certain stocks as you see fit.
- Although algorithms help you choose and manage your portfolio, the process on the other end works the same as an online broker. Your buy orders are matched with sell orders and the trade is executed.
- Robo-advisors will often let you set up alerts so that you’ll know right away if something is amiss with your portfolio.
Read More: Buying One Stock vs. Diversifying Your Portfolio
Technology makes investing in stocks for beginners easy. If you choose the right tools and put time into researching investments, you can keep your risk low while still maximizing your earnings. Whether you prefer an online broker or a robo-advisor, knowing the differences can help you make the right decision.
- The Ascent: How Does a Brokerage Account Work?
- Investopedia: What Is a Robo-Advisor?
- FXCM: What Are The Pros And Cons Of Online Trading?
- Business Insider: A Financial Planner Explains When You Should Consider Investing With a Robo-Adviser — and When You Shouldn't
- How Stuff Works: How Online Trading Works
- Money Under 30: Stash Review: This Simple App Helps You Start Investing In Minutes
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.