Stock Trading for Beginners
Are you interested in investing in the stock market but you are unsure where to start? With all the stock market information out there it can be a little intimidating and overwhelming. Don't let this discourage you. The stock market can be a great investment choice, but before you begin trading any stock on your own you should know a few basic trading terms.
When a stock price is listed, two prices will be displayed. The lower price is the bid price while the higher price is the ask price. The bid price is the highest price someone is willing to buy the stock for while the ask price is the lowest price someone is willing to sell the stock for. The difference between the bid and ask price is called the spread. The smaller the spread the better it is for an investor. A high bid-ask spread can mean the stock is not very liquid making it harder to find a buyer when you are selling a stock (the opposite is true also).
The next terms you should be familiar with are market orders and limit orders. A market order simply means you will buy or sell a stock at the best price available in the market at the time of the order. When buying a stock, a market order will usually be the ask price quoted unless the stock price is moving very quickly. When selling a stock, a market order will usually be the bid price unless the stock price is moving very quickly. A limit order allows you to determine what price you will buy or sell a stock for. For example if a stock's last trade was $25.15 you may want to put a limit order to buy in for $25.00. If your limit order can be filled at $25.00 or lower, your order will be filled. If the stock can not be purchased for your limit price or better, it will not be purchased. A limit order can be placed as a day order or a (GTC) good until cancelled order. A day order will expire at the end of the trading day while a GTC order will remain open until executed or a cancel order is placed.
Another common trading term is a stop order. A stop order is used to protect against a large loss. For example, let's say you bought Microsoft (MSFT) at $30 per share but you want to sell the stock if it drops below $28 per share. In this case you would put in a stop order at $28. If MSFT goes down to $28 your shares will be sold. While stop orders are very good protection against loss you do not want to place them too close to the current price. For example, if you were to put a stop order at $29.50 on MSFT and the stock traded down to $29.50 but later rallied to close at $31 per share, you would no longer own the stock as your stock stop order would have closed out your position (sold your shares).
Finally, two others terms used in trading are round lots and odd lots. Round lots are 100 shares while an odd lot is less than 100 shares. If you were to purchase 350 shares of stock, you would be purchasing 3 round lots of 100 shares and 1 odd lot of of 50 shares. Overall, it doesn't make much difference, but round lots and odd lots are traded a little differently. Also, some brokerages will charge a higher fee for odd lot purchases. This is a good thing to check out before selecting a broker if you plan on making smaller trades. Like most things, the more you learn about stocks the more you realize there is to learn. However, we all have to start somewhere and investing can be a very rewarding experience both financially and personally.