• Stock Trading

    Stock trading is about as simple an investment as there is; however, which stock to invest in, that is the question. But that is for you to decide. This article will provide you with basic steps and fundamentals of how stock trading works.

    Stock Trading Basics

    What has always made my head spin is how is all this stuff tracked? How can billions and billions of dollars in millions and millions of stock trades be tracked and so accurately recorded? Well, I finally said, you know what? I don’t need to know all that, but I do need to study and do my homework in order to maximize my profits and minimize risk. If I’m going to play the game, I need to know the fundamentals and the rules. I need to get better and better. Hey, this is my job!

    Stock trading equals one person buying and one person selling a part of a company or business (a share) When you watch the financial tv news you see the floor of the New York Stock Exchange with so many people in colored jackets running to and fro, yelling and pushing. It looks like complete chaos. But what you don’t see is the marvelous and mind-boggling technology calculating and handling all that is going on. It’s all choreographed and moving like a cyber ballet.

    When I was a kid in school we saw a demonstration of how a bill moves through our legislative system, so I like to think of the journey of a stock trade in the same fashion.

    Example Strategy Used In Stock Trading

    Let’s say I want to buy 100 shares of Billy Bob’s Best Buttered Beans (BBBBB). I could call my broker and place an order, but of course, I do that online with my stock trading software. I decide if I want to place a limit or market order (more in a minute) and my online broker takes my order. Now my broker has a connection down there in the middle of all that riot-looking mass on the trading floor. That connection goes in search of another colored jacket who will be willing to sell me 100 shares of BBBBB at the price I have indicated. If he finds someone who agrees, then, it’s a done deal and I now own 100 shares of BBBBB. I could sell my shares in much the same fashion. Of course, there is more to it than that, but you get my drift. All I did was key in my requirements via my trading software, hit the execute button, and it’s over. Most of the time it happens just as quickly as you enter the data. Instant trade confirmations are common.

    Types of Stocks

    As owner of a part of a company, you have the right to vote on important matters and also to receive dividends if they are paid, but let’s keep this simple. There are basically two types of shares:

    Common Stock
    Most stocks held by individual investors are common shares. When you hear news concerning the share price, they are reporting the price of common shares.

    Preferred Stock
    The major difference between common and preferred stock is in payment of the dividends. If there is trouble, preferred stock owners will get paid first.

    Different Types of Orders to Trade Stocks

    Market Order
    This is the quickest and most simple way to get your order filled (find your buyer or seller). When you execute a market order you are simply saying you want to buy or sell a specific number of shares for whatever the market price per share is at that moment. While this type of transaction is quick and easy, it is also at the mercy of market volatility. Your trade’s closing price may not be what you were expecting. It is however the least expensive type of order with regard to broker fees.

    Limit Order
    When you place a limit order you instruct the broker to buy or sell a certain number of shares at a specific price. The transaction will not be completed unless that predetermined price is met. Commission charges are higher for limit orders than market orders, however, if your order is filled, you get what you want.

    Stop Loss Order
    Stop loss orders are a little more complex, but they offer you some protection. You place a stop loss order with your broker at a price that is below the current market price per share. If the stock trading price takes a sudden drop, your previously set broker instructions will cause a sell transaction of your shares at that stop loss order price; thereby protecting you from further dropping prices. If things remain constant, or if the price goes higher, you still own the stock and the stop loss order never triggers. Think of it as an insurance policy you have on the side.

    Trailing Stop Order
    This is a little like a stop loss order, but in reverse, in that you place it to protect your profits instead of limiting your losses. If you have already made gains on your investment, you can place a trailing stop order to insure that you keep those gains and make even more if and when the price increases. The trailing stop order will move (trail along) as the price rises, and your profits continue to increase.

    Good Till Canceled Order
    When you place an order with your broker, regardless of what kind of order, if you place “good till canceled” instructions, then your order will remain active until filled or until you cancel or modify it.

    Day Order
    A day order is only good until the close of that day’s business. If your order does not get filled, it is cancelled and if you want to continue in the same manner the next day, you will have to place your order again.

    Stock Trading Success

    Nothing speaks louder than success and you can have a lot of it stock trading. As usual, I encourage you to read and learn, practice and become highly proficient executing your trades. You’ll also learn to employ various strategies and learn to follow corporate news and world events that might give you an edge on upcoming price movements in your stock. Take advantage of the plethora of knowledge available to you online, and most of it is free.

    © 2011, www.daytraderoptions.com. All rights reserved.

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