Gear up for Stock Trading - Buying and Selling Stocks

Anyone with money to invest can buy and sell stocks. Stocks trading has its own specialized vocabulary but once you have the basics under your belt you can understand better how market works. As with any investment the more knowledge you have about the stock trading the more successful you are likely to be.

Most stock trades are done through a broker – an intermediary who takes orders and executes them. Brokers can also offer advice about which stocks to trade and the conditions of the market. These ‘full-service’ brokers include online trading, broker assisted trading, and some brokers offer options like Interactive Voice Response System for placing orders by telephone and wireless trading systems for making orders by using web enabled celluar phones or other handheld devices.

Some broker have their own proprietary software for placing orders over the internet while others allow you to access their order department through their website with a password. Whichever systems they use, almost every broker offers a variety of charting options that allows you to track movements on the stock market. Analysis softwares may be included in their service or available for an extra fee.

Type of Orders

There are different types of orders that can be made when buying or selling stocks. A ‘market order’ is an instruction to buy or sell at the current market price. The order is usually executed very near the price you are quoted at the time of your order. However, if the stock price is fluctuating or is not actively traded there may be a difference between the quote and the actual transaction.

A ‘stop order’ or ‘limit order’ can be placed if you expect the stock price to move and wish to buy or sell at a certain price above or below the current market price. A stop order instructs the broker to trade a a certain price, while a limit order is an instruction to trade at a specified price or better.

A stop order helps to limit losses or protect profits. They become effective when the market hits the stop price but may trade above or below the stop price because they are traded at market price after they become active.  Limit orders may not be placed at all even if the market reaches the limit price. If the market moves quickly there may not be time to execute your order before the price falls out of the limit price range. For example, you buy Bell Canada (BCE) at $50 and then put in a stop order of $45. If the price of the BCE falls to $45 your stop order will become effective and your stock will sell at the market price. Conversely, if you place a limit sell after buying BCE for $60, when the price rises to that level your stock will be sold at a profit. You could also buy BCE with a limit buy order for $45. This allows you to (possibly) buy stocks at less than current market. If the price does not fall to your limit buy price, however, you will not buy any of that stock.

All orders can be placed as good ‘till cancelled’ (GTC) or as a day order. GTC orders remain in effect until they are cancelled but day orders remain effective only until the end of the current trading day. Stocks are usually traded in ‘round lots’.  – lots of multiple of 100.  It is possible to trade other amount of stocks, but this kind of trade is called an ‘odd lot’. Trading can handle both types of orders, but odd lot orders are slightly more difficult to fill than round lot orders.

Stock Investment Basics

Understanding the stock market starts with understanding stocks A stock represents partial ownership of a company the smallest share possible Company’s issues stocks to raise capital and investors who buy stock are actually buying a portion of the company . Ownership even a small share gives investors rights to a say in how the company is run and a share in the profits if any While stocks give owners certain rights they do not  carry obligation in case the company defaults or faces a lawsuit In a worst case scenario .the stock will become worthless but that is the limit to the investors liability

Companies issue stocks to raise capital. They may need a cash injection to expand or to acquire new properties. Each stock issue is limited to a certain number of shares and when they are issued they are given a par value. The market quickly adjusts that par value according the perceived health of the company and its potential for growth

Investors usually buy stocks because they believe the company will continue to grow and   the value of their shares will rise accordingly. Investors who acquire stock in a new            company are taking more of a risk than buying shares of well established companies but the potential gain is much greater Those who bought Microsoft shares early in the game and did not sell them saw an exponential rise in their value.

Stock trading is done on stock exchanges like the New York Stock Exchange NYSE or  NASDAQ - National Association of Securities Dealers Automated Quotation System This means that only companies listed on a public exchange have shares that can be bought  and sold on the open market. Of course you could also buy partial ownership in a smaller company that is not listed on a stock exchange but that is a very different type of .investment than buying stocks.

 Because stocks must be bought and sold on a stock exchange an individual investor needs a broker to make transactions for him. Broker stake orders to buy or sell a certain stock. The order may include instructions to trade at a certain price or simply what the market will bear once the broker receives the order he attempts to execute it by finding a buyer or seller as the case may be. The buyer or seller is also represented by a broker and each broker receives a commission on the sale.

Stocks have several advantages over savings investments Because they represent  ownership in a company they give the holder rights to participate in major decisions the company faces Every share represents one vote and share holders are regularly asked to vote on important matters Ownership also allows stock holders to benefit from any profits the company makes Profits are distributed in the form of dividends and may be issued  .once or twice a year at the sole discretion of the company directors.

If the company prospers the value of the stock will rise and distribution of profits also increases. The down side of this is that if the company does poorly the value of the stocks may fall. When compared with savings investments like bonds or bank certificates of deposit stocks have the potential to earn more money but they also carry the risk of loss.Learning about the stock market and the various investment strategies can help to, minimize loss and most investors find they do much better on the stock market than is possible with any kind of savings investment.

Bull Markets and Bear Markets

The stock market moves up and down everyday but when movements continue downwards for a period of time the market is referred to as a bear market.

Upward moving markets are bull markets. If a particular stock is doing well it is said to be bullish . If it is losing value it is bearish.

Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to short term fluctuations a bear market is commonly understood as one where prices of key stocks have fallen in price by 20% or more over a period of at least months Even during a bear market however prices may increase temporarily. Bull markets are the opposite of bear markets - they are indicated by a rise in prices of key stocks over a certain period of time.

Usually stock market conditions reflect the state of the economy. During bull markets the economy is doing well unemployment is low and interest rates are reasonable. Bear markets usually occur during times of economic slowdown. Investors loose confidence and companies may begin laying off workers At the extremes an exaggerated bear market can lead to a crash brought on by panic selling. An exaggerated bull market can be caused by over enthusiasm of investors It leads to a market bubble that will eventually burst.

It is easiest to make money during a bull market Getting in right at the beginning will allow you to make the most profits During a bull market any dips in the market are temporary and should soon be corrected The upward rising prices cant go on forever though so the investor needs to be able to gauge when the market reaches its peak and sell at that time.

Although most money can be made during bull markets there are also opportunities during bear markets Knowing the characteristics of each type of market allows investors to profit from the. As would be expected when the market is bullish investors wish to buy up stock. The economy is doing well and people have extra money which they wish to invest in stocks This creates a situation of short supply which drives up prices even higher During bear markets on the other hand prices are falling so investors wish to unload their stocks and put their money in fixed return instruments such as bonds As money is withdrawn from the stock market supply exceeds demand which drives prices down even further. Bear markets represent opportunities to pickup stocks at bargain prices Getting in near the end of a bear market offers the greatest chance for profit. The prices will most likely fall before they recover so the investor should be prepared for some short term loss - Short selling is also an investment strategy during bear markets. Short selling involves  selling stock that you do not own in the anticipation of further price drops so that when it comes time to deliver you can buy the stock for less than you sold it.

Fixed return investments such as CAs and bonds can be used to generate income during  a bear market so called defensive stocks are also safe to buy at anytime These   include government owned utilities that provide necessities no matter what state the.economy is in.