Getting Started with Stock Trading
Anyone with money to invest can buy and
sell stocks. Stock trading has its own specialized vocabulary but once
you have the basics under your belt you can understand better how the
market works. As with any investment, the more knowledge you have about
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 condition of the market.
These 'full-service' brokers charge a relatively high commission. To
cut costs, many people use discount brokers that charge significantly
less. You don't get advice, but to some, that is an advantage.
Some of the services commonly offered by 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
cellular phones or other handheld devices.
Some brokers 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 software
may also be included in their service or available for an extra fee.
Types 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 at 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 BCE falls to $45 your
stop order will become effective and your stock will sell at 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 stock 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 ‘til 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 multiples of 100. It is possible to trade other amounts of stocks,
but this kind of trade is called an 'odd lot'. Trading software can
handle both types of orders, but odd lot orders are slightly more difficult
to fill than round lot orders.
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