In this tutorial, we will guide you through the process of buying and selling stocks. This process may appear complicated at first, but is, in fact, quite simple. It has its own rules, its own set of characters and its own language code.
We will discuss the following topics:
WHERE DO I BUY STOCK?
Stock is evidence of ownership in a corporation. Corporations whose shares are owned by persons outside the "corporate family" are publicly traded. The Securities and Exchange Commissions (SEC) established the National Association of Securities Dealers (NASD) to make rules to assure orderly commerce in publicly traded stocks. Persons in the business of trading stocks are brokers and must register with the SEC.
When you want to buy (or sell) shares of a publicly traded stock, you will use the services of a broker*. A broker (stockbroker) must pass an examination on securities law to be licensed to trade securities. Licensed individuals are registered representatives of brokers. Brokerage Houses are large firms that deal in securities and may belong to an exchange such as the New York Stock Exchange or the American Stock Exchange.
*Some companies allow shareholders to purchase shares directly from the company without having to use a broker. For more information about this, see the tutorial on Dividend Reinvestment Plans.
HOW DO I MAKE TRADES?
After you have opened an account, you need to decide which type of account is best for your needs.
Cash Accounts are for investors who will just buy or sell
shares of stock with the money that they deposit into the account.
Margin Accounts are for investors who may wish to borrow against
their securities or engage in special trading activities.
Normally you can make trades in your account in person, by mail, on the telephone, or over the Internet. Each brokerage firm will advise you of their capability to handle your orders.
WHAT ARE SOME OF THE ORDERS I CAN PLACE?
A market order
gives your broker the signal to buy or sell a particular security
at the current market price. A market order guarantees execution,
it does not guarantee a specific price. You can give your broker additional
instructions:
Limit order - Allows you to instruct your broker to buy
or sell a stock at a specific price (or better). You would use a
limit order when the stock you are interested in is changing in
price. This prevents the broker from buying too high, or selling
too low. A limit order guarantees a price but not an execution.
Stop loss order - Lets you instruct your broker to sell
a stock if it falls below a specified price to prevent further loss.
You would use a stop loss order if you were concerned that a stock
you own will fall in price. A stop loss order is used to protect unrealized profits or prevent further losses on a position.
Good-till-canceled (GTC) or day order - When placing a limit, stop or stop-limit order, you will be asked if you want it to be "good until it is canceled" or "good for the day." This allows you to choose the length of time the order will remain open for execution at the marketplace. At Ameritrade, GTC orders are canceled at the end of the next month.
This concludes our tutorial on buying and selling stocks.
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