From my post yesterday, Stocks 101,we’re familiar with what stocks are, but how do you go about owning them?

Unless you work on a stock exchange, generally stocks are purchased through a stock broker who buys stocks through the exchange on your behalf.  The broker may be an actual person who you deal with at your financial institution or investment company and place orders through them or, quite commonly now, it could be an online broker where you place the orders on your computer.  The broker then charges you fees for placing the order.  The price varies from broker to broker, and can depend on a number of things like the number of shares purchased, how frequently you trade (buy or sell) shares, and the value of your account with the broker.

If you’re only looking to purchase shares and don’t need any advice, then you’ll most likely want a “self-directed” portfolio at an online brokerage.  They tend to have the lowest fees for trading because you’re executing trades on a computer instead of with a live person, and there is more automation in place.  Even between online brokers, the price to trade shares varies quite a bit.  The least expensive trades at a Canadian online broker I’m currently aware of is Questrade who has $4.95 trades (actually $0.01 per share with a $4.95 minimum and $9.95 maximum charge).  If anyone else knows other good deals, please share in the comments.

As I stated in my “Putting your Finances on Cruise Control” post, stocks are considered risky because their values can fluctuate widely in a short period of time.  A way to reduce this risk is owning a number of stocks among a number of diverse sectors (like banking/finance, pharmaceutical, natural resources, technology, etc).  The theory is, the more “diversified” your portfolio is, the more protected you are from day to day fluctuations of any one stock.

It could be at worst quite difficult, and at best time consuming trying to personally identify a number of individual stocks across multiple sectors that you want to hold.  Because of this, many people who want equity in their portfolio hold stocks indirectly in the form of Equity Mutual Funds.  A mutual fund is merely a collection of securities that are administered by financial professionals who decide what securities to hold, and how much of them to hold.  Then “units” of the fund are sold to investors.  An Equity Mutual Fund is comprised of mostly stocks, and likely some cash on hand to make future purchases. (As opposed to a Bond Fund which would hold bonds, or a Money Market Fund which usually holds treasury notes.)

Mutual funds can simplify the ownership of stocks, but it can also come an increased cost: of course the fund managers charge a fee for their services.

More tomorrow about mutual funds, their fees, and some alternatives.