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Stock Trading. How to Trade Stocks.
A stock quote is the current price a stock is selling at. If you don’t know the current price of a stock, you can call your broker and ask him, “Could you please give me a quote for Pencils R Us?” And he will reply, “$25.14.” That simply means that if you want to buy one share of Pencils R Us at that moment, it will cost you $25.14 per share. For many investors, the stock quote is the most important piece of information they can receive about a stock. It tells them exactly how much it will cost to buy the stock, and what they will receive if they are selling it.
Types of Stock Orders
Buying a share of stock might be as easy as calling up your broker and telling him what you want, but you can place an order in a number of other ways that give you better protection. The three most commonly used orders are
If no time limit is specified on an order, it is a day order, meaning if it is not executed or cancelled by the end of the trading session, it simply expires. If you want an order to stand on the market longer, use one of the following time limits when the order is placed:
If either of the first two time limit notations is used, the order will be canceled by the brokerage firm on the last trading day of the week or month when the order is placed. An order with the GTC notation can theoretically remain unexecuted in the market for years, although most brokerage firms require a GTC order to be renewed or confirmed monthly or quarterly and will charge more for executing this type of order.
What Is a Market Order?
Market orders are the most frequently used by investors when buying and selling stocks. When you call your broker and say, “Buy 200 shares of Bluebird Manufacturing” or “Sell 150 shares of Best Long Johns, Inc,” you are placing a market order. You specify both the stock and the amount of shares but not a price or time. The stock is bought or sold at the market price of the security when the order reaches the exchange floor.
An investor knows that the market order will be executed promptly - usually within a few minutes (or even seconds) after it is placed - unless there is a thin market for the stock. In this case, execution may take more time. It is understood that a buy market order will be executed at the lowest available price and a sell market order will be executed at the highest available price.
Brokers cannot and do not guarantee a specific execution price on a market order. This point confuses many investors who call their brokers, request a price quote on a stock, place the buy or sell order, and then find out that the order was not executed at the price the broker quoted over the phone. Investors must keep in mind that the broker does not execute the order directly. They write the order ticket and place the order, but it is not executed until it reaches the trading floor. All the while, the stock market is fluctuating and constantly changing.
What Is a Limit Stock Order?
When you place a limit order, you specify the price at which you want to buy or sell the stock. You can place either a buy limit order or a sell limit order. The limit is never the same as the stock’s current market price. It is always “away from the market,” meaning either above (on sell limit orders) or below (on buy limit orders) the current price. In other words, you set the boundaries for the price you’ll accept. You can’t do that with market orders.
You also set a time limit on limit orders – GTW, GTM, or GTC. If no time is specified when the order is placed, it is considered a day order and will be canceled at the end of the trading session if it is not executed.
Buy Limit Order
Buy limit orders are used to buy stock at a price that is below the current market price. Perhaps you observe that Vitamins Unlimited common stock is trading at $24 per share. You want to purchase the stock, but only if the price is $22 or lower. You believe that the price will decline to this point during the next few weeks before rising again. So you enter the following buy limit order to your broker: “Buy 100 Vitamins Unlimited common stock at $22 GTC.” If and when the price declines to or below the limit price, the order will be executed and the stock purchased at $22 or lower. The risk you face is that the buy limit order may not be executed at all. If the stock does not trade down to at least $22, the limit price, the order will not be executed.
Sell Limit Order
Sell limit orders are used to sell stock at a price that is higher than its current market price. For example, you own 100 shares of Northwest Coffee, which is trading at $27 per share. You believe the stock will reach a peak price of nearly $30 per share during the next few days and then decline. Obviously, you want to sell high, so you enter the following sell limit order to your broker: “Sell 100 shares Northwest Coffee at $29 GTC.” If and when the stock’s prices rises to or above the limit price, the order will be executed and the stock sold at $29 or higher, accomplishing your goal. If the price never rises to the limit price, the order will not be executed. This is the risk of limit orders.
Stop Order, Stop Limit Order
A stop order is used primarily to limit losses on profitable stock positions. When you place a stop order, it means that when your stock reaches a price that you specify, it automatically becomes a market order. So for example, you own 100 shares of Mama's Chili that you bought for $50 and it is now selling for $65. You can decide to protect most of your profit by placing a sell stop order that specifies Mama's Chili stock be sold when the market price falls to $60, thus cementing a $10 gain.
With stop orders, you don’t have to watch the stock market every second; instead, when the market price drops to $60, your stop order automatically switches to a market order and is executed.
The risk of stop orders is that the order may not be executed at the stop price. In reality, the stop price is only a “trigger,” prompting the order to be entered as a market order. The price you actually buy or sell it at may differ depending on the activity of the market. You won’t know the exact price at which the stop order has been executed until the confirmation is received. Also, if for some reason the stock market gets a shock during the news day that affects all stocks, it can temporarily send prices lower, triggering your stop price. If it turns out that the downturn is actually merely a short-term fluctuation and which now indicates that the stock is bad or that you risk losing profit, your stock may sell before you ever have a chance to react.
Stop orders can only be used on stock exchanges, you cannot place a stop order on a NASDAQ stock or over-the-counter-traded stocks. If you want a stop in these markets, your broker must actually simulate a stop order by watching the market and entering the market or limit order you designate.
Tips When Buying Orders
When you are ready to buy shares of stock, first make sure you have enough money in your account to cover the cost of the shares, as well as the commission fee. Then find out the following information:
Thus, an example order you might tell your broker would be: “I wish to buy 600 shares of Personalized Calendars, ticker symbol PC, at $30 or less. The stock is on the New York Stock Exchange, and I want this order to stay active until Friday of this week.”
If the price of PC hits $30 or less, your broker should acquire the shares for you. You will find that 600 shares of PC have been added to your account, and the money for them has been taken out (600 shares x $30 = $18,000 + commission fee.)
Tips when Selling Orders
A sell order is simply the opposite process of buying. Be sure you know how many shares you have in your account when you want to sell a stock. Tell your broker: “I wish to sell 600 shares of Unique Fractal Pictures from my account. The ticker symbol is UFP, and the stock is on the New York Stock Exchange. I want to sell at $35 or higher, and keep the order good for the rest of the week.
If the price of UFP hits $35 or higher, your shares should be sold and the money from the transaction (600 shares x $35 = $21,000 - commission fee) deposited into your account within three days, ready to be used in another purchase.
So in the end, assuming you bought 600 shares of UFP at $30 and then sold the 600 shares at $35 you would have made a $3,000 profit!
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