How to Trade Stocks
Sometimes what seems like the obvious to seasoned investors is not so clear to someone just entering the world of investing. In this article we’ll take a look at how to simply buy and sell stocks, where to trade, and the types of trade orders that you can place.
Where Can I Buy and Sell Stocks?
Primarily, you have two options as far as where you can buy and sell stocks:
- Discount Broker – discount brokers originated during the internet growth stage. Essentially, you are able to buy and sell stocks at a low commission and do not receive investment advice on these transactions.
- Full Service Broker – stock trading originated with this model of service. With a full service broker you get advice on what investments to make in addition to other direction which may include tax advice, in depth research, and more. For the additional services and advice you end up paying a higher commission on your trades or a percentage of your total assets.
If you are looking to make a simple trade and know how to do so or have a limited amount of money to manage, you are probably better off going with a discount brokerage so that the higher commissions of a full service broker do not cut into your returns. The more homework you do on your own, the better off you will be in going with a discount broker.
If you have absolutely no knowledge of investing (we’re talking zero, here, as index and mutual funds are really a no brainer with minimal required research) or have a very large amount of money to manage that will require effective tax strategies, then you may want to make the move to a full service broker. If you have read this far, you probably fall into the former category and would be better off in going with a discount broker.
What are the Best Online Discount Brokers for Stock Trading?
New players are always entering this field, but here is a brief comparison of discount brokers that are worth mentioning. All trade prices mentioned are for stock trades. Many discount brokers have a list of no fee mutual funds, otherwise they are typically $20-$25 per fund to purchase. You’ll also want to pay attention to any hidden account or inactivity fees:
- TradeKing: Trades are $4.95. They have a no fee IRA. I have an IRA and taxable account with TradeKing.
- Scottrade: Trades are $7 and there are also many localized brick/mortar branches.
What are the Different Types of Stock Trades?
1. Stock Limit Order Definition
This is an order to buy or sell a set number of shares at a specified price or better. A Limit Order guarantees price, but not an execution. There are two kinds of limit orders:
- Buy limit order: your trade will only be executed if the market price reaches your specified limit or goes lower.
- Sell limit order: your trade will execute if the market price reaches your specified limit or goes higher.
2. Stock Market Order Definition
An order to buy or sell a stock immediately at the current best market price. You cannot specify the price in which you would like to buy or sell at with a market order. There are two types of market orders:
- Buy market order: your trade is essentially executed at the real time ‘ask’ price.
- Sell market order: your trade is usually executed at the real time ‘bid’ price.
Market and limit buy and sell orders are by far the most common type of stock trade orders. Market orders are more common, but limit orders can help you limit losses from a wide bid-ask spread.
3. Short Selling Definition
Short selling is a less common practice than typically buying or selling a stock for its value. With short selling, you are betting that a given stock is going to go down on price. You also borrow money from the broker and are obligated to buy the stock back at a lower price, should it fall. If the price goes up? You’re in trouble.
4. Stop Order Definition
An order to buy or sell a stock at a given price to limit losses or cash out on gains. For instance, if you want to sell all 50 of your shares of GE when it hits $35 to take a profit, than you can set a stop order for $35. Once the stock price hits $35 a market order is placed on your behalf.
5. Stop Limit Order Definition
Combines the features of a stop order and a limit order. Instead of relying on market bid/ask prices, you set your limit for what you want to buy and sell at.
6. Stock Option trade Definition
Typically not for beginning or even intermediate investors. Therefore, we’ll save it for another post.
7. Trailing Stop Order Definition
An advanced order type in which an order is executed at a certain fixed percentage above or below the market price.
In my previous experiences, I personally recommend opting for buy and sell limit orders for beginning and intermediate investors. Rarely will you have a need for placing any other type of order on a simple trade. Why limit orders versus market orders? Something can be said for the peace of mind that comes with setting your own price.
What is Stock Trade Duration?
Stock duration is the time limit for which your order is good for and can be one of three options:
- Good for today (4 PM EST): this is the only option for a market order. It is also available for all other types of orders.
- Good until canceled: not available for market orders. Your order is good indefinitely until you personally cancel it.
- Good til date: also not available for market orders. Your order is good until a date that you specify. If it reaches that date your trade is canceled.
Stock Trading: It’s not too hard!
The short summary of this post is to sign up with a discount broker, do some homework, and use buy and sell limit orders to make your trades. It’s not rocket science, so get out there and start investing wisely! Stay linked in for an upcoming post on the basics of buying and selling mutual funds.