how to buy stocks online

When you set out to buy stocks online for the first time, you have to make a decision: what online stock broker to use? You might choose one of the top 10 online stock brokers or you might decide to go with one not on that list. The question is though, how safe is your money in any of these broker accounts?

A good example is E*Trade which has been having lots of difficulty in the last couple of years. You can see the graph showing the stock price reaching $24.00 in 2007 and going steadily down from there all the way to $1.60 today. That $1.6 price almost makes it a penny stock and it is a price I am very uncomfortable with.  

E*Trade is a very well known online broker and they have the best interface I have ever used. I am not picking on them or saying they are risky and I wish I could put all my money in their accounts because I love the web site. However, I feel scared that the stock price is too low and something bad is going to happen. I hope I am wrong but we all have to sleep at night and so I have just withdrawn all the cash I have in the account and had them send a check. The key word in that last sentence is “cash”.

Please note that I have not sold any of the stocks I have in the account. That is because the stocks I own in my E*Trade account are not in jeopardy if E*Trade were to go bankrupt. Online stock brokers are just the conduit for the buys and sells and the stock I own or you own in any company is actually in the company and not in the online broker where you buy the stock.

Now you need to know that E*Trade and probably most every other online stock broker is part of the FDIC $250,000 insurance that guarantees your account up to that much. Since the total of everything I have in my accounts is less than $250,000, I probably didn’t really need to withdraw the money because it would be insured even if they went bankrupt. As long as you have less than the $250,000 in any account, you should be safe.

In summary, any money you have directly in stocks or stock funds is invested in those individual companies and not in the online broker. If you have $1,000,000 in MSFT stock and the stock broker you use goes belly up, you are just fine because your money is in Microsoft and not in the now bankrupt online broker. However, if you have $500,000 in MSFT stock and another $500,000 in cash sitting in your account, you would stand to possibly lose $250,000 because only half of the $500,000 would be insured through FDIC. Of course, if you have one million dollars to invest you are probably not reading this blog trying to learn how to buy stocks.