Category: 2. How to buy and sell stocks?

Being a good stock trader is less about being a hotshot like in a Hollywood movie and more about seeing a profit from your efforts. To that end, here are our tips for stock trading.

• Keep excellent records: This is for personal and tax reasons, especially if you are trading outside of a retirement account. You’ll have to report your profits to the IRS, and excellent records will make that easy and help you avoid an audit. Plus, keeping tight records will help you track your own progress and growth.
• Build over time: There is no need to jump in with everything you’ve got in your first trade. You can and should take things slowly at first. Control your exposure risk factor and make sure that you are building an overall portfolio that works for your long-term and short-term goals.

If this world excites you, get into it!

• Learn everything you can and practice on paper-trading apps.
• Read about the markets every day and soak in as much as you can about the investing world.

Knowledge is power in the world of stock trading, so keep learning, keep adjusting your strategy as needed, and keep track of your results.

Virtually every financial venture has its own “language,” and that includes investing in stocks. Basic terms you’ll need to be familiar with include the following:

• Ask — This is the minimum price that the seller is willing to accept for the stock.
• Bid — The max price that buyers are willing to pay for a specific stock.
• Spread — The difference between the lowest ask price and the highest bid price.
• Market order — A request to buy or sell stock at the best available price as soon as possible.
• Stop order — The price that the stock must reach for a market order to be executed.
• Stop limit order — This is when the price has been met and is filled until price limits can be met.
• Round lots —  This refers to buying blocks of stock, usually 100 shares (or more) at one time.
• Odd lots — This refers to buying less than 100 shares. For example, you might buy 30 shares.
• Fractional shares — Many stocks today trade at several hundred dollars per share. If you’re investing a flat amount, say $2,000, and the price of the stock is $150, you’ll need to buy 13 1/3 shares to complete the order. The 1/3 is a fractional share.
• Market order — This is an order you place with your broker to purchase stock immediately at the best price available.
• Limit order — This is an order where you set a specific price you’re willing to pay for a stock. The broker will wait to purchase the stock until that price or a lower one is reached. Limit orders can also be placed on the sale of the stock. For example, if a stock you own is currently at $25 and you want to sell at $30, you can place a limit order to sell when the price reaches $30.
• Stop-loss order — This is a price you can set on a stock you own that essentially creates a floor. For example, if you purchase a stock at $25, you can set a stop-loss order at $20. Should the stock price fall, the sale will be triggered at $20, which will limit your loss.
• Earnings per share (EPS) — This is the company’s annual profit divided by the number of common stock shares outstanding. If the company has $10 million in net profit and 5 million shares outstanding, its EPS is $2.
• Price-earnings ratio (P/E) — This is the current stock price divided by the EPS. If a company’s stock is trading at $50 and has an EPS of $2, the P/E ratio is 25 (50 divided by 2). P/E ratio is a way to compare the performance of a company with its competitors. Generally, the lower the P/E ratio, the better.

Once you’ve bought stocks, you should make sure to keep your investments secured. While most brokerages have encrypted websites and other cybersecurity measures to protect your data, there are some things you can do yourself to make sure your funds are protected.

• Never give out your passwords or account information. Come up with passwords that are hard to guess and don’t contain any personal or easy-to-guess information such as birth dates or names. If you can, consider using a password manager so you don’t have to write down your passwords.
• Don’t share information about your financial accounts online. This is especially true for social media.
• Consider using a VPN like NordVPN. A VPN, or virtual private network, creates a private network within a public network like the internet. This encrypts your data and makes it so others can’t view your transactions online. A VPN like ExpressVPN also protects your identity and location while you’re online, which helps keep your assets anonymous. 

Once you’ve determined your investing strategy and have practiced with a paper trading app, it’s time to start the actual stock trading!

How to Buy a Stock

The details of how you buy shares of a company vary depending on which type of broker you use, but the general concept will remain the same.

• First, decide which stocks you want to buy and how many. Research companies that you already know. If your broker offers third-party research or investing tips, start there. You should also read financial news about the company, such as how well they performed during the last year. You can also check out financial analysts’ recommendations, although you will probably have to pay extra for that.
• Next, choose your stock order type. Essentially you will indicate what you want to buy and for how much. If you’re buying at the market price, then the order is executed immediately.  If you have a specific price in mind that you want to trade at, then you’ll put in a limit order, which tells your broker to wait until the price falls.

Warning: Most brokers are set up for self-directed trading. If you need broker assistance, the trading fees will be much higher. You may want to use broker assistance on your first trade. But after that, you’ll need to get comfortable with online trading.

How to Sell a Stock

Selling a stock is almost exactly like buying stock, but instead of you making a bid for a stock, you’re the one making the ask. However, the goal is a bit different. Instead of trying to get the lowest price for a stock, you want to get the highest price.

• At the very least, you should limit the costs of what you originally purchased the stock for.
• If you want to sell the stock immediately, you’ll sell at market price. But if you want to sell at a specific price, then you can set a limit order. Your stocks will only sell when the price you set is reached.
• If you’re buying and selling through a broker, you’ll also need to fill out a trade ticket or order to initiate the sale.
• Once the sale is made, the cash will usually transfer to your account two days after, although the processing time varies by broker.

There are stock market simulators (also known as paper trading apps) that allow you to trade with fake money. This is a fantastic way to get your feet wet in the world of stock trading without actually exposing yourself to real financial risk. Play around with a few simulators to get a feel for them. We recommend using E*TRADE paper trading service, as it allows you to see the impact of your trades on your account before execution. This service is available both online or via the app.

Make sure you know the company you’re investing In. That includes both the company you want to buy stock in and the industry it operates in. Before buying any stock, you should first thoroughly research the company.

1. Look for companies that have an established track record over several years of increasing revenues, profits, and dividends.
2. Look closely at the company’s product line and assess how competitive it is within its industry. Naturally, a more innovative company is likely to outperform any “me too” imitators.
3. It’s also important to know the industry the company operates in, which means studying its competitors. The company’s future performance will depend largely on how strong it is within its industry group. If it’s growing faster than its competitors and introducing more popular products and services, it’s likely to continue performing at a high level.

Evaluate the Company’s Competitors

There are several metrics you can use to compare a company to its competitors. For example, you can use the P/E ratio. If you’re looking at a company that has a P/E ratio of 15 and the average for the industry is 20, the company is likely to outperform its competitors as long as the low P/E ratio isn’t due to a negative factor with the company.

Use an Investment Research Service

It will help to subscribe to an investment research service, such as Morningstar or The Motley Fool, which you’ll pay a subscription fee for. But many full-service brokerage firms offer a large amount of research and analysis on thousands of individual companies. Make sure you take full advantage of this information before buying any individual stock.

You don’t need a lot of money to start investing in stocks, but it’s still a good idea to keep a monthly budget for trading. How much money you will need depends on where you invest. If you’re investing in a discount stock broker that offers fractional shares, you can invest for as little as $100. However, if you invest with a full-service broker, you’ll probably need at least $10,000.

When creating a stock budget, keep these questions in mind:

• How much of my profit will I reinvest into stock trading?
• If I lose money, how long will I wait before getting back into trading?
• What constitutes a “good trade” for me?
• How much of my portfolio do I want to expose to individual stocks?

Experienced individual stock investors already know this, but if you’re new to investing, you’ll need to diversify. Invest no more in individual stocks than you can afford to lose. Put another way, be sure you have most of your portfolio in other assets.

You should always plan to have several stocks in your portfolio. For example, if you have $10,000 to invest in individual stocks, you should plan to spread the investment across several different stocks and maybe as many as 10. That will limit your loss should any single company you own collapse in price.

You should also consider adding a stop loss to each stock holding. That will limit your loss by triggering an automatic sale if the price falls. Full-service brokers have video tutorials that will show you exactly how buying stock works on their platform. Be sure you’re familiar with the process before you begin.

1. Start with an emergency fund. This is a completely safe and liquid account with sufficient funds to cover at least three months’ living expenses. It should be held in a bank account, where it’s fully insured and available to be accessed quickly in an emergency. Having this type of account will keep you liquid, avoiding the need to sell investments to pay for emergency expenses.
2. Next, your debt should be well controlled. It’s fine if you have a mortgage, a car loan, or student loan debt. But if you have substantial credit card debt, the best “investment” will be to pay it off or pay down. It will do you little good to pursue a 10% return in stocks when you’re carrying credit card debt that’s costing you 20%.
3. Make sure you have other investment types. At least some of your portfolio should be invested in bonds to reduce overall investment volatility. But it’s also a good strategy to have money invested in managed accounts. These can include having some mutual funds or exchange-traded funds (ETFs) or even Robo advisors. Any of these options diversify your stock holdings between professionally managed and self-directed portions.

Each of the brokers listed below has been reviewed here on Investor Junkie and will be a good trading platform, depending on your individual needs.

1. TD Ameritrade – Best Customer Support
2. E*TRADE – Most User-Friendly Broker
3. Robinhood – Best to Trade Cryptocurrencies and Stocks
4. Public.com – For ETF & Fractional Shares Investing
5. Ally Invest– Best overall broker
6. Zacks Trade – Make Broker-Assisted Trades at No Additional Cost
7. Merrill Edge – Best Full-Service Broker

Most of these brokers also offer the full range of investments, including mutual funds, ETFs, bonds, and options. Many also provide their own Robo-advisor service, as well as other managed portfolio options.

Once you feel that you understand the world of individual stock trading well enough to put some money into the market, you’ll need to decide how you want to buy stocks. There are three main options when it comes to buying stocks:

1. Full-service stock brokers – This is the most popular way to trade stocks but also the most expensive. Full-service stock brokers are licensed broker-dealers and offer several services, including research, wealth management, and tax planning. It’s best for people who want to trade individual stocks or options but don’t have time to stay up to date on things like tax planning. You’ll often be assigned a broker who handles your trades for you.
2. Discount stock brokers – If you want to trade stocks but don’t need all the extra perks of having a personal broker to help you, then we recommend trying out discount stock brokers. These are brokers that are often accessible online and are a fraction of a full-service broker’s cost. In fact, you can often trade commission-free.
3. A direct stock purchase plan – If you want to buy stock directly from a company without using a broker, you’ll need to use a direct stock purchase plan. Not all companies sell their stocks directly to retail investors, and they often have restrictions in place, like when you can buy or sell the company stock.