If you are interested in stock trading but don’t know where to begin, then the following instructions are useful for you.
The easy and popular option to purchase stocks in the current times is through the online route. You may wonder about how to buy stocks online. The answer is through online stock brokers. You simply need to open an account online and transfer funds to it electronically. Now you can use the funds in your account to purchase the stocks you want. Online stock borkerage account can be opened with lesser amount of money because the cost is on a per transaction or per share basis.
Full service brokers, on the other hand, are conventional stock brokers who sit with you and determine a financial plan for investing in stocks according to your income, assets, debts, lifestyle, risk tolerance and many other factors. Financial advice regarding various aspects of stock trading is also provided by a full service broker.
How to select stocks?
There are two types of stocks; Common stocks and Preferred stocks.
Common stocks entitle the shareholders to a claim on the profits of the company. Such stocks also confer voting rights to the shareholders with one share usually carrying a single vote to elect board members. Common stocks yield higher returns although the risk factor is high since you lose the entire amount invested in the company if it closes down. In the event of liquidation of the company, the common shareholders receive their share money only after the bondholders, creditors and preferred shareholders are paid.
Preferred stocks guarantee a fix dividend to the shareholders at all times. This is at variance with common stocks which provides variable dividends fixed by the company’s board members. Preferred stocks do not confer voting rights on the shareholders. Preferred shareholders are paid before the common shareholders if the company liquidates. The company can also re-purchase preferred stocks from the shareholders.
The best way to gather information about a company is to read the company’s annual report and annual letter to the shareholders. The broker’s website also features many analytical tools to evaluate the company on various factors such as quarterly earnings, SEC fillings, recent news, conference call transcripts, etc. Take the tutorials to use various tools and attend seminars organised to provide valuable insights into stock selection process.
Deciding on the number of shares to purchase
The best way to start stock investing for beginners is to purchase just a single share. Owning a single share gives the beginner a feel of the stock market and helps in determining whether or not you can handle the volatility of the market. Thereafter, you can gradually increase the number of shares you purchase.
Deciding the order type
You need to determine the type of stock trading or the order type. These are various order types.
Market Order- Market order means that you want to buy or sell shares at the best available current market price. With a market order, you may not get the quoted price to buy or sell the shares because of fluctuations in the bid and ask prices. Market order is usually used when the trader wants to complete the order known as filling and is not concerned with the price. If you are concerned about the price, then use market order only for blue chip stocks which remain steady and don’t undergo wide price swings.
Limit Order- A limit order means that you want to buy or sell a share only at a specified price. This is also called “All or None” because you don’t buy or sell the shares until and unless their price reaches the specified value. Limit order can be used to buy or sell stocks of smaller companies having wider price fluctuations or when price is more important than order fulfillment.
Stop Order- Stop Order means that the trade will be filled only when the price of the shares you want to buy or sell reaches a particular price called stop price. The stop order becomes a market order and is filled as soon as the price of the share reaches the stop price. Stop order is commonly used for reaping profits. However, one disadvantage of stop order is that it becomes a market order when the stop price is reached and gets filled at the best possible price. The price can be lower than the price set by stop order.
Trading in mutual funds
Mutual funds is an investment company which invests the money obtained from various investors in different kinds of assets such as commodities, bonds, stocks, real estate, etc. The major types of mutual funds are bond funds, stock funds, index funds and balanced funds. In order to own a portion of assets in mutual funds, the minimum investment is between $1000 and $5000. Mutual funds trade once a day after the market closes.