How to buy stocks and other securities

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There are a few ways to directly and indirectly buy stocks:

Besides the above, every pension fund also invests in stocks, bonds and other assets. Since pension is mandatory in some western countries, you might already be investing money without realizing it. 

6.1 Brokers

Keep in mind that brokers and exchanges also exist in the cryptocurrency market. The difference is that you don't need a broker when buying cryptocurrencies. You can create an account on a cryptocurrency exchange and trade with other users without the need of a broker. This is not possible in the general stock market. This is important to understand if you want to buy cryptocurrencies because brokers will always cost you a premium on top of the market price. For example:

In the Netherlands, you can buy bitcoin from the same company in two ways:

Bitonic is a broker that provides the assets themselves and sells them for premium prices. Or you can create an account at the BL3P European exchange and buy bitcoins from other traders. On BL3P you'll always pay less (depending on the orderbook).

When you buy or sell through a broker, you have to pay a fee. This fee can either be a commission fee or spread. I’ll discuss both later on. The fee is different for each broker and is depending on what security you are buying or selling. Specialised brokers can also be used for OTC trading. OTC stands for “over the counter trading”. OTC trading takes place directly between the involved parties without a central exchange. This is mostly applicable for corporate bonds which I’ll discuss in-depth in later chapters.

A full service broker can also offer different financial products like research and advise, tax advise, retirement plans etc.

6.2 Exchanges

Exchanges also act as a middleman. It’s a (de)centralised platform where you can directly trade between another trader or investor. The buyer and seller determine their own prices. An exchange can also charge fees. In this case, the middleman is providing the platform to trade on. While a broker acts as an intermediary between you and an exchange platform.

If you want to know how to exactly buy stocks (how to place buy and sell orders) you should read "Reading the orderbooks for beginners". 

6.3 Hiring a financial advisor

When you hire a financial advisor from your bank, the advisor uses a brokerage or exchange to buy stocks or other securities. A financial advisor is mostly hired when the person in question doesn’t know (or does not want to know) anything about stocks and financial markets in general. But hiring someone comes at a cost which can have a huge impact on your returns. And you never know if the advice is even good advice. Because financial advisors have many customers and they will probably give all customers the same advice based on how much cash they can spend. If you want to be in control of your investments and not let someone else rule your future, you should take the time to learn all the basics about stocks and other securities. 

The best way to find out if your financial advisor is providing you with valuable information is by asking if they have any stake in the security they advise you to buy. And if so, at what price did they buy them. If the security they advise you to buy is really a good investment, the advisor would definitely have bought them on his/her personal account.  

6.4 401(k)

401(k) plans are offered by employers in the U.S. as a retirement savings plan. If you enroll in a 401(k) plan, a portion of your salary (before tax) will go to the 401(k). The company might add some extra money. You can invest money into a 401(k) before taxes so you don’t have to pay any taxes over the gains. You do have to pay taxes when you withdraw the money when you are retired. Basically meaning you can reduce your taxable income and invest at the same time. There are multiple types of 401(k) plans:

If you want to know if this is something you might want to use or are already using, you should check this overview of 401(k) plans to see if you picked the right plan.

401(k) plans mostly invest in mutual funds and ETFs (don’t worry, you’ll learn what these funds are in later chapters). But your 401(k) might also have bonds and individual stocks. 401(k) s are mostly created by your employer so they decide how much money you can pour in and what stocks or mutual funds are chosen. It’s a very convenient way for the zero effort investor. 

6.5 Direct stock plans

Some companies offer their employees to buy stocks from the company directly. Meaning you don’t need a broker to buy their stocks. Do note you are only limited to buying the stocks of the company you work for. Buying stocks directly might be cheaper but you should always check your company policies to check what rules they have. Because your company is holding the stock you are not in complete control.

6.6 Dividend reinvestment plans

These plans are mostly the same as direct stock plans but they reinvest the dividends to automatically buy more shares. Actually many brokers also offer these plans. This is a good way to reinvest your dividends without thinking about it. 

6.7 Robo-advisors

Relatively new to the market are robo-advisors. Robo-advisors are basically virtual robots that gather some data about your investing goals.  Once they have enough data they will automatically create an investing portfolio. You basically have to do nothing at all. Robo-advisors will automatically adjust your portfolio when needed. You do have to pay a fee but the fee is much lower when compared to a human financial advisor. And some robo-advisors are actually free to use. While this sounds interesting, you let someone or in this case something… handle your money. You can do the exact same thing any robo advisor can do with lower costs. Use with care.