The stock market is available for nearly anyone to make stock transactions. Although the process of buying and selling shares is straightforward, generating consistent profits, especially as an active trader, is a tall challenge. New investors should be careful about the amount of capital they commit to their stock transactions. Never risk more money than you can afford to lose. Investors today have many options for stock market participation. They may employ full-service brokers who trade their capital on their behalf, or they may open online brokerage accounts that offer complete control over all orders.
Setting Up Account
- Identify the level of hands-on control you want over your stock trades. Some investors prefer to leave all trading decisions up to another individual, and others want to directly make transactions themselves.
- Determine the amount of capital you wish to commit to the stock market and your overall risk tolerance. With brokerage accounts, you have access to “margin,” which allows you to buy more shares than your cash would otherwise provide. This is convenient but also increases your risks as you are borrowing money from the broker.
- Select a broker that provides the kind of hands-on control you require and complete an application form. Online brokers typically give clients complete control over their portfolios. Brick-and-mortar brokers may offer “discretionary” services where they trade your money for you based on their own analysis of the stock market. Be sure to note in the application if you wish your account to include margin.
- Fund the account with money once the application is approved.
Buying And Selling Shares
- Place a “buy limit” order for the stock you wish to purchase if you want to set the maximum price you are willing to pay for the shares. This ensures that volatile market conditions do not fill your order at an unattractive price. This is a good way to create an order that may not be filled until a later date. It ensures you will get in at the price you want, but does not guarantee that the order will actually be filled should prices not trade at that level.
- Place a “buy market” order if you want to purchase shares no matter the exact price at the time of execution. This order type guarantees your shares will be purchased.
- Place a “buy stop” order if you want your account to execute a stock purchase only if the current price rises past a certain point. In this order, you specify the share price that triggers the order. Traders will use buy stop orders to automatically enter “breakouts,” where a stock makes a substantial move in a new direction, surpassing prior highs.
- Sell shares using the same order types, “market,” “limit” or “stop.” The sell limit ensures you no less than what you want, but does not guarantee the order will actually fill. A sell market order will execute nearly instantly, but volatile market conditions may fill the order at a lower price than you wanted.
- Brokerage account
- A sell stop order is a common way to use the “stop” order type. It is much more popular than buy stop orders. Sell stops are placed as a form of protection for the account. A sell stop basically forces the brokerage account to automatically sell your stock if it falls below a specified price. This ensures that your losses are limited in the event that adverse market conditions take a turn for the worse. Many traders immediately place sell stop orders after their buy orders complete. This way, they do not have open positions that carry large risk. They define the most money they are willing to lose, then create the sell stop order to meet that criteria. They refer to this strategy as “using stops.”