How to Trade Stocks Online for Beginners
How to Trade Stocks
When you shop at a major retailer near your home, you can easily tell how much an item costs by checking the price sticker or shelf tag. You know that the price is not going to change during the few minutes that elapse between placing the item in your shopping cart and paying for it. However, online stock trading does not offer the same assurances. Prices change constantly, rising and falling in real time as buyers and sellers interact. When bidding is at its most active, you may see prices change several times in a matter of seconds. The fast pace of online trading requires using special techniques. There are five common methods you can use to trade stocks online. Not all brokers offer all options, however, and the commissions can be higher for some types of trades, so you will need to investigate each option thoroughly.
These are the 5 main methods to trade stocks:
Most stock trading fall into this group. You tell your broker to buy a set number of shares at the current price or sell your shares for the best possible price. Market orders receive almost immediate execution and are very straightforward, which means you will normally pay the lowest commissions on these types of trades. Most individuals who are just learning how to trade stocks choose to use market orders for at least their first few trades.
Limit orders allow you to determine the price you are willing to accept for shares you are selling or pay for shares you want to purchase. The broker will not execute a limit order unless the price meets your instructions. For example, suppose you own shares in Company A. The shares are currently trading at $50, but based on the company’s latest financial statements, your broker predicts that the price could fall as low as $30 per share. Although you could issue a market order to sell your shares, you are not certain that your broker’s gloomy prediction is correct. Just in case he is correct, however, you could issue a limit order and tell him to sell your shares if the price reaches $40 per share. If he does not succeed in selling all of your shares before the price drops below $40, however, some or all of your shares could remain unsold as your broker will not sell your shares for less than the price you set.
Stop Market Orders
Stop market orders share many similarities with limit orders. You tell your broker the price at which he is to sell your shares. When the stock reaches the price you stated, the order becomes a market order and can be executed immediately. However, unlike limit orders, your broker can sell your shares even if the price drops below the one you specified. Using the same information that was used in the example under limit orders, suppose you had issued a stop market order with a sell price of $40 per share. The stock reaches that price, but before your broker can execute the order, it continues to drop and reaches $30 per share. With a stop market order, your broker can still sell your shares at the $30 price. With a limit order, he could not sell the shares at the lower price.
Stop Limit Orders
Stop limit orders can be customized to meet your specific needs. The first step is to set the price that will trigger the activation of your order. When the stock reaches that price, the order becomes a limit order that is to be executed at the limit price you chose. To illustrate, again suppose that you own shares in Company A. The stock is currently trading at $50, but you are concerned that it might drop. You issue a stop limit order that has an activation price of $40 and a limit of $30 per share. If the stock never drops as low as $40, your order is never activated. If it drops to $40, your order becomes active and your broker will attempt to sell your shares. However, if the price falls below the $30 limit you set, your broker will not sell your shares.
Trailing stops are similar to limit orders, but instead of setting a fixed dollar amount, the limits are based on percentages or points. For example, suppose you paid $100 per share for stock in Company B. You are willing to risk part of your investment, but you want to protect most of it. You issue a trailing stop that tells your broker to sell your shares if the price drops more than 10 percent. Trailing stops are often used when trading individual stocks.
When you trade stocks online there are a few other options you can choose. These include:
• Designating lots: It is common for people to have a favorite stock that they buy on many different dates. Each set of shares purchased at the same time is referred to as a lot. If you decide to sell part of your shares, your broker will likely assume that you want him to sell the lot that you have owned for the longest time. However, tax issues sometimes make it more beneficial for you to sell a lot that had a higher or lower purchase price. In this case, you need to specify which lot you want your broker to sell.
• Setting time frames: You can enter orders that are good until you instruct your broker to cancel them, but you can also enter orders that are good for just one day. If the order is not filled, it will expire.
• Placing rules: You can place a restriction on you trade that requires your broker to fill your order completely or not execute it at all. For example, you could place an “all or none” restriction on an order to purchase 1,000 shares of Company C. If your broker cannot secure that many shares, he will purchase none.
How to trade Stocks? Always Diversify!
It is a proven fact that in investing, diversification reduces risks. If you invest all of your funds in shares from one company, you could lose all of your money if that company fails. However, the same thing can happen if you invest in a single sector. For example, before the “dot-com” bubble burst, many investors had all of their money tied up in Internet-related or high-tech companies. The S&P 500 and similar indices cover a variety of sectors, ranging from financial institutions to industrial manufacturing. Diversification through buying individual stocks can be difficult, especially if you have a limited amount of money to invest. Using one of the indices as a guide, however, you can invest in index funds or exchange-traded funds that make it easier for you to diversify.
You probably know that it is quite possible to acquire a great deal of wealth by trading in stocks. In reality, however, you are not likely to become a millionaire overnight. People who are most knowledgeable about how to trade stocks will tell you that consistency over the long term is the key to building wealth. If you are able to start while you are young, you can build a substantial retirement account even with modest gains. Realistically, I recommend you look for average gains of 6 to 8 percent per year. Remember that the stock market rises and falls. One year, you might achieve a gain of 10 percent, but the next year, you might only see a gain of 5 percent. When you average the two years, however, your gain is 7.5 percent per year. If you can achieve this average year after year — and allow your gains to compound — you could eventually see your initial investment begin to double each year.Starts your online stock trading today and see what you can achieve.