So you’ve decided to take financial matters into your own hands and open a brokerage account and you want to know how to trade stocks for the first time.
Entering the world of stock trading a big decision and one you shouldn’t make unless you’ve already established financial essentials, such as an emergency savings fund and a retirement account with carefully selected mutual funds.
Here at Money Under 30, we recommend that beginning investors stick with mutual funds and ETFs that are broadly diversified. Studies show that people who have diversified portfolios and invest for the long run do better than those who try to pick stocks and time trades.
That being said, if you’re enticed by the challenge and want to roll up your sleeves and see what you can do against Wall Street’s best and brightest, do so with a small amount to start (never more than 10 percent of your investable assets).
People can have different reasons for wanting to take on the responsibility of managing their own money, but the bottom line is that you want the freedom to pick and choose what stocks go into your portfolio. But you may not know where to go or how to even place a trade. A quick Internet search for discount brokers gets more hits than you have time to research. And once you do decide on one, you’ll face unfamiliar terms the moment you buy your first stock from ask/buy spreads to limit orders.
When deciding on a brokerage service to trade with, there are several categories to consider.
1. The first thing you’ll want to check is the fee charged for each trade.
Keep in mind, you’ll have to pay that fee when you buy as well as when you sell. Some brokers require a minimum balance, so if you plan on starting with less than $2,000, you may be limited as to whom you can choose.
2. The last major thing to consider is what you plan to do in the future.
If you intend to trade products like options or want to employ leveraged strategies, you’ll need to open up a margin account which may come with varying requirements on your part to enable.
3. Now that you’ve decided, it’s time to place your first trade!
The first thing you should notice is two different amounts called an ask price and a bid price. The difference between these is called the “spread.” The ask price is the price you’re be offered if you want to buy the stock, and the bid is the price you’re offered to sell at. For example: XYZ has a bid of $20.00 and an ask of $20.10. You can sell it for $20 or buy it at $20.10. The spread will widen if the stock is thinly traded which can drive up transaction costs in the long run.
4. When you finally place an order to buy or sell, you’ll face several options.
Those options are market order, limit order and stop order. You’ll also have an option to place an order that stays in effect for the day, expiring if not executed, or GTC (good-’til-canceled) which lasts anywhere from 30 to 90 days depending on the broker/dealer.
A market order is the simplest order you can place. This tells them to place your buy or sell order at the first available moment, regardless of actual market price. If you’re in a hurry, this is the fastest way to ensure your order goes through, but you may not get it at the price you want it.
Limit orders allow you to buy or sell a stock at a specified price or better. If you wanted to buy XYZ but didn’t want to pay more than $20, you could place a buy limit order for $20. If the stock drops below that floor, your order will be executed and if it never drops below $20, your order will expire and the trade won’t take place.
Stop orders are designed to execute when a stock price crosses a predetermined amount. Unless you’re engaged in shorting activities, you’ll most likely place stop orders to lock in profits on a stock you already own to prevent taking a big loss. If you own XYZ that you bought at $20, you might place a stop order at $18 if you’re concerned the price could drop dramatically. This way, you ensure your order to sell will be placed automatically if the stock crosses that critical limit whether you’re watching it or not.
Try not to be intimidated by all the different ways you can trade a stock. Whatever broker/dealer you choose will have a guide to help you along the way and most offer live support if you need it, and you can find more information on the SEC’s website.
Do you have any more questions about buying and selling stocks?