Each week, one of our investing experts answers a reader's question in our InvestingAnswers' Q&A column.
Question: Hello. I've decided I want to start investing, and I'm thinking of using an online broker instead of visiting a brokerage firm. Is there anything I need to know before I start?
Karen K., Palo Alto, Calif.
The Investing Answer: I'm a big fan of online brokers. You can trade any time you want (and almost immediately, if you want), the fees are typically lower than a brick-and-mortar broker, and your investment options are virtually limitless.
That said, remember there's no professional guiding your decisions, so without some sense of direction, investing online could seem to be like walking on a tight rope without a net.
But don't worry, I'll guide you through the process with these four tips.
First, have a way to fund your online investment account.
This is simple but often overlooked. Most online brokers want you to be able to transfer funds electronically to your online investment account from a checking account. Many also allow you to mail in checks, cashier's checks or money orders to fund your account, but it may come with fees and slow down your investing plans, so be aware of that.
Next, know what you're investing toward.
This will help you decide what kind of online investment account you should open. For instance, if you're planning to invest for retirement and not touch the money until you turn 60, you'll likely want toopen an IRA or a Roth IRA account, which offer tax advantages that can save you tens of thousands of dollars in the long run (We talk more about this in The 8 Best Reasons to Invest in a Roth IRA).
If you're investing for fun or for a shorter term goal, you'll likely just want to open a regular investment account -- then you can sell your investments without penalties (but with normal capital gains tax if you profit from your sale).
Third, know your online broker's minimums and fees.
When you know what kind of investment account is right for you, you'll be better prepared to shop for the best online broker. Online firms like TD Ameritrade, E-Trade, Sharebuilder, Scottrade and others typically let you buy or sell stocks, ETFs, mutual funds or other investments for $10 per trade or less.
And if you want to dollar cost average and invest automatically on a monthly or weekly basis, Sharebuilder charges as little as $4 per trade (as we mention in How Can I Start Investing With Just $100 A Month?)
Not all are the same, so get to know each online broker's "fee schedule" or "pricing" pages.
Also pay attention to the account minimums, which tell you how much cash you'll need to open an account in the first place (If you're opening a retirement account, most firms typically waive this requirement).
Finally (and most importantly), know exactly what you want to invest in.
Just as you shouldn't go to the grocery store on an empty stomach without a shopping list, you don't want invest online without a definite plan of what you want to buy. It's not a bad idea to know the basics of investing before you dive in.
If you don't have time to research individual companies for eight hours a day, you may consider investing in mutual funds or ETFs that allow you to spread your investment dollars among several companies.
If you enjoy the challenge of stock picking, you may want to read The 8 Most Important Facts To Know About A Company Before You Invest to avoid mistakes many investors make when choosing stocks.
With cash, some knowledge and a good investment plan under your belt, you should be ready to responsibly invest online in as little as 20 minutes.
Good luck!
SEE ALSO: Here's What You Need To Earn To Buy A Home In 25 Cities
Please follow Your Money on Twitter and Facebook.