How does stock trading work?

 

 

 

Basic stock trading for beginners:

 

Stock trading basics

 

In order to trade stocks, you will need two things:

  • A brokerage account
  • Money in that account to invest

 

 Keep in mind, risk with stocks is very high, only gamble with what you are prepared to lose.

 

Brokers typically charge some sort of commission (a fee for each transaction you place – meaning a charge for each order you buy or sell of stocks). Most of these commissions range from $3-10 dollars per transaction. Check the Broker Comparison for actual costs. Because you have to pay commissions, you need to place sufficiently large orders that enable you to make more money than the commission spent buying and selling stocks.

 

For example, if you buy a stock that is offered for $100 and your broker commission is $4, the total cost for the stock is $104. Then when you go to sell the stock, say it is now worth $110, you will have to pay the commission fee ($4) so you will only get $106 from the $110 sale. In this example, you bought the stock for $104 and sold for net $106 so you only made $2 on the trade yielding a 2% gain on the original $100 price.

 

Now say instead we trade ten of the $100 stocks mentioned in the previous example. This time we buy for a total of $1,004, because the stocks cost $100 each, we buy ten, and have to pay the $4 commission. We then sell the stocks for $110 each, then taking out our commission, would yield $1,096. In this case for the ten stocks we made $92 (the difference between proceeds and sales $1,096 - $1,004) yielding $92, or 9.2%, on the purchase or ten stocks for $100 each.

 

The lesson here is to be careful and be aware of commissions, if you trade too often, with too little amounts, commissions will greatly reduce your profits.

 

Once you have a brokerage account you be able to buy and sell stocks. This process is very simple, simply input the stock ticker (the small code for the company you want to purchase/sale) and your brokerage should give you a quote what the security is currently trading at. You can find stock tickers on Google Finance, Yahoo Finance, and through most brokers and hundreds of other sites.

 

  •  If you like the offer price simply place a market order for however many shares you want - Depending on your broker, the order will be filled either immediately or within a few minutes, then you own that stock/security
  •  If you want to get more advanced, (set your own bids or offers) you can set a limit, or a stop order - See the Basics page for how this works

 

Depending on what broker you use, stops and limits will be input slightly differently, but all brokers have the ability to for you to place these orders. If you need help understanding the difference between a limit order or stop order check out the trading basics page. A quick reference is also included at the bottom of this page.

 

Lastly, do not be intimidated. Stock trading is very similar to gambling, but with better odds because the house does not always win. Stock trading can be a lot of fun and great way to build wealth. Again, trading stocks is risky, make sure you understand what you are buying, and the possible losses, before betting your cash on a part of a company (or any security).

 

Quick basic reference for markets

 

Buying

  • Market --> Buys the security at the current offered market price (Offer Price)
  • Stop --> Execute order when price is above your set price
  • Limit --> Order will be filled when the price is below your set price

 

Selling

  • Market --> Sells the security at the current offered market price (Bid Price)
  • Limit --> The lowest price you will sell a stock for
  • Stop --> The price your portfolio will automatically sell a stock at (so if the stock drops to this price, then sell)

 

Other market basics

  • All or None --> Specifies if all of the shares must be purchased for the same price, if not selected it will buy the available shares at one price then move to the next bids in the list (and possibly buy shares at a different price).

Article by Jacob K Lloyd

Jacob@startingwithstocks.com

Published: 2 July 2015

Last updated: 3 July 2015

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