How To Trade Stocks

Fundamentals of Market Investing by Adam J. McKee

The actual “how to” guide to buying stocks is something that you will need to get from your broker because each brokerage firm does things a little differently.  If you don’t like computers and would rather call your broker and have things done over the phone, you’ll need to have a full-service broker.  Know that you will be paying a hefty premium to have a broker enter your trades for you.  Online brokerages are the way the vast majority of investors buy and sell securities these days (outside of employer-sponsored retirement accounts).

Online brokerages were once called “discount” brokers because they did things cheap, and they didn’t give you any advice or provide any other additional service.  They entered orders.  That’s it.  Recently, the number of online brokerages has reached critical mass, and there has been something of a price war.  Most brokers will enter a trade for around $5 as of this writing.  If you are a do it yourself kind of person and want to save money on commissions, you want an online brokerage account.

Back in the day, brokers cultivated wealthy clients, and they didn’t want to bother with the little person.  They tried to trade in “round lots” of stocks, usually (multiples of) 100.  That is no longer the case.  Your electronic broker will faithfully execute your order, no matter how many shares you buy.  If you want to buy one share of Amazon with your $1000, you can do that.  Since you will earn profits as a percentage, you would be better off with that one share of Amazon than you would be with 1000 shares of a “penny stock” that could just as quickly go to zero.  Always remember, the cost of a share of stock is a meaningless number.  You must look at the P/E ratio to figure out if a stock is cheap or expensive compared to another stock.

A 10% gain on $1000 is $100, and it doesn’t matter if you earned it by owning one share, ten shares, of 1000 shares.  You will probably be better off if you think of each of your stock positions in terms of dollars rather than shares.  Thinking in shares can result in your portfolio being lopsided, and if your most expensive stock goes down, your less expensive ones cannot make up the difference.  In other words, do not think in terms of one share of Amazon and 100 shares of Ford, think in terms of $1000 worth of Amazon and $1000 worth of Ford.

To start a brokerage account, you, of course, have to fund it.  Different brokerages have different requirements, but most will now allow you to open a basic account with as little as $2,500.  Contrary to the popular misconception, you do not need to be wealthy to invest in stocks.  You can start small, add money every paycheck, and over time you can build an impressive nest egg.  The magic of compounding works as a percentage so it will work with any amount of money whatsoever.

It would be great to start with $100,000 like most paper trading accounts give you, but that isn’t the reality for most of us.  If you are a novice, it is best to start small anyway.  If you lose a few hundred dollars from making bad investments, you can recover easily.  If you lose half a million dollars in your retirement account, you may end up eating Alpo.  Just about everything in the market is denominated in percentages, so you can get a really good idea of what works and doesn’t works without risking a lot of money.

Some brokerages relegate you to a second-class citizen when you open a small account, and you are stuck with the crappy software and none of the benefits.  Do not stand for this.  There are too many competitors that will treat you well.  Demand the full-blown, top-of-the-line trading platform.  Learning a trading platform takes a lot of time, and you do not want to switch.  That fact may keep you with a substandard broker, so choose wisely when you begin.  The good brokerages are proud of their proprietary software, and they will often let you take it for a test drive using paper trades for a period of time.  (Paper trades work just like real ones, except there is no real money involved.  Think Monopoly money).

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