We all need to be investing toward our future. There are many different types of investments you can look at, don’t forget to invest in yourself, but the stock market can be one of best for many of us. When you first start out investing in stocks it can seem daunting and complex, but you should not let that stop you. First learn how does the stock market work, then you need to move on to how to buy stocks. That is what I will be covering here.
What Are Stocks?
Stocks are portions of a corporation put up for sale so the company can raise capital or the owners can profit from the business without selling the entire business. Anyone who has money to invest is able to purchase stocks in both large multinational corporations or incorporated small local businesses offering stock sales. Stock profits involves either buying the stock at one price and selling it for a larger amount (a “bull”) or keeping a stock and anticipating profits when the corporation offers a dividend (a portion of the profits) to all the eligible stock holders. Learning how to buy stocks is not complicated and involves a few simple steps and understanding the keywords for executing an order.
Opening A Trading Account
Trading stocks involves first opening a stock account. There are several stock trading companies offering accounts both as internet-based online services, phone ordering, personal service with a stockbroker or a combination of all three. I personally use Trade King, be sure to check out this TradeKing Review or open an account by clicking here.
Opening an account can mean the account holder either deposits a cash amount into a stock trading account or the account holder can trade “on margin.” Margin trading is buying and selling stocks with a line of credit. No matter how the account is established, however, the money must be available to pay for any stock purchase.
Buying stocks can be a very risky gamble or a well-researched investment. Stock buyers usually do research into the corporation to determine several factors affecting the stock price. Such things as past profits and losses, the amount of debt, past dividend payments, stock dilution (how many total shares are available for public purchasing) and the people who run the corporation on a daily basis all indicate the prospect of future performance. All these factors can affect the stock price. There are good companies with stocks very inexpensive while awful companies have stocks terribly overpriced. Only adequate research will find the good bargains and the dangerous deals.
Just like buying any service or product, there is a markup on buying stocks. This pays the broker and the trading company handling the order. Commissions are only paid on executed orders. There is no charge to place an order, modify or cancel the order. These commissions vary and can be based on several options: flat fee, percentage of the sale, a small flat fee coupled with a percentage or an annual fee for various amounts of trades. Be sure to calculate into the trading account deposit the funds necessary to cover any commission applied when the sale executes. If new to stock trading consider dealing with a broker on the phone or in person for the first few orders. The broker can offer instruction in how to buy stocks and the offer key insights into the market.
Placing An Order
Placing an order is a relatively simple process either using a website or dealing directly with a broker. First the buyer should find the stock symbol for the corporation. These are 1-to-5 letter codes for the stock. Be careful to find the right symbol or an order can be placed for the wrong stock. The process involves either giving the stock symbol over the phone to the broker or typing in the symbol in the stock order window of a trading account website. (Most websites have prompts so when the stock symbol is entered a window will open verifying the corporation name.) Stock orders can be placed for various time durations – the “end of day” order will be cancelled if not filled by the end of the trading day when entered and “open until cancelled” will remain open until the order is filled according to the price and amount specified in the stock order. There is no guarantee an order will be filled at a particular price or volume. Stocks can also be ordered as “all or none.” This means the entire order will be filled and not just partially resulting is less stock in the portfolio.
Market orders for stock mean the buyer will pay at the given price trading on the market. There is a small risk in this order because there is no guarantee the price available will be the final purchase price. The stock may go up or down before the total order amount is filled.
A stock limit order specifies the maximum amount the buyer will pay for the stock. If the price exceeds the limit then the sale will not execute. Limit orders protect the buyer from paying more than expected because the limit guarantees the total amount paid. The limit order, however, may also mean the stock order is not executed because the sale price was never exactly as specified in the limit.
A stop order is a combination of both the market and limit order. The stock order is not executed until the stock price reaches the amount specified. The stop order also guarantees the full stock amount will be purchased. Once active, however, there is no guarantee the stock order will be filled for the specified purchase price. The price can change between the order activation and the final execution.
Stop Limit Orders
Stop limit stock orders execute at the both the specified price and specified volume. Both amounts are guaranteed for the buyer. The drawback to the stop order, however, is the stock may never reach the exact price while the exact number of stocks ordered is available for purchase. Depending on the volume, price and activity (how many stocks are trading during the session day), stop limit orders may execute immediately, take several days or never match the order specifications.
Orders can be modified if not executed. If an order is placed and does not execute immediately (market orders will execute almost immediately while other order types may take any imaginable length of time), the buyer can change the terms for the order: volume, price, order type and length the order is open.
There are many different ways to become a millionaire and investing in stocks can be a great way to help you get there. Make sure you take time and understand the terms talked about above as you start to buy stocks and invest toward your future, but don’t let fear be the factor that holds you back from starting. There is real power in starting small as you save money and invest for your future. You can always start investing with little money and go from there.
Don’t put it off, start today.
Author: KC Beavers
KC Beavers is a semi-retired entrepreneur. The subject of personal finance has always fascinated him. In an effort to not bore those around him with all his love of personal finance as much he has come here to bore all of you instead.
You want to pick a good stock? What is the up and coming, hot on the rise, social media and digital media company? Pick a few of these companies and diversify your investments. Be careful because once these social media companies hit their peak, they eventually start to decline, like Facebook did. Buy and then sell at the right time, so you make big bank.
How I can open a trading or stock account online considering I am not American citizen? I am interested to invest in stocks as well as to do trading online. This is very useful for beginners.
Great tips KC. I've often considered trading stocks but I've always felt a lack in education and time to do the research. If I were to trade stock I'd probably stick to companies I know and use on a daily basis such as 3m, Walmart, or Johnson and Johnson because these companies aren't going to go out of business in the next 5 minutes but on the same note are not going to have huge profits and gains in a single year either.
@StumbleForward It's funny, but I think companies forget there's a whole part of investing beyond making the actual trade (which in itself is somewhat daunting). It's about coming up with a plan, finding "the right" companies, making the investments, learning to track your results, and learning how to keep learning about your companies (and strategy) while not listening to the day-to-day crap news.
This is a great overview. I haven't done a ton of trading outside my retirement portfolio, but I want to coming up here pretty soon. I really like the trailing stop loss orders. I do that most of the time with our company stock purchase program. It helps eliminate a bit of the downside risk, but leaves you the upside opportunity.
Very nice overview! There is a lot to know and involved with trading stocks, but the beauty is that it really is not that difficult once you learn.
Good overview! I use Questrade for my trading because (so far). Usually, I just fill a market order, but there's definitely value in refining your purchase orders.