By now you have learned about stocks and opening a brokerage account.? This third installment of beginner investment education will walk you through buying and selling stocks.
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Before You Buy
Before getting too excited about buying stocks, be sure you have funded your brokerage account.? The days of having to buy round lots (buying shares in multiples of 100) are over ? you can get started with as little as $500.? Be sure the money has cleared your account and is ready to use for purchasing stocks.
You need a strategy.? Without a strategy you might as well hit the tables at the nearest casino ? your chance of success will be equal.? Most strategies fall under one of two theories:? 1) Value Investing and 2) Growth Investing.? Success can be found in either strategy, although historical test have shown Value Investing has outperformed Growth Investing on a long-term basis.? The next blog installment (101.4) will address choosing a strategy.
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Selecting Stocks
I recommend building a list of at least five candidates.? I never buy the first undervalued stock I find, and sometimes I won?t buy any.? When I have cash to invest I will conduct my research without time constraints.? Do not rush a stock purchase just because the price is increasing; take one day or even one week to research your candidates before making a purchase.
Know what you are purchasing.? Describe the company to your friend, spouse, or even better, to your kid.? If you cannot accurately describe what this company does you should not buy it, regardless of how good it looks on paper.? There are plenty of opportunities in industries and companies you can understand.? Also avoid companies whose value is derived from financial assets such as loans and derivatives.? The true value of these companies can be very difficult to calculate.? We saw during the Lehman Brothers collapse in 2008 that financial companies can tank your portfolio due to the difficulty of truly understanding their assets.
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Baby Steps. It's a Big World of Investing.
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Know your selling price?before you buy.? This is the most common mistake made by investors of all levels of experience.? Regardless of your strategy know at point you will exit this stock.? Make the exit point a price, not a time, as you cannot predict market forces.? All things equal, choose the company with the most attractive exit price.
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Making the Purchase
Once you have selected your stock you will need to enter your purchase request.? You will most likely see two prices for your company:? the ?bid? price and the ?ask? price.? Be sure you understand the difference:
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Bid:? The bid is the price that you can sell your stock for.
Ask:? The ask is the price that you can buy a stock for.
Learn more about Bid and Ask.
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Ensure you have enough money in your account to cover the purchase plus commission.? For example, you want to purchase shares of ABC.? You have $1,000 to spend and you want to spend it all on ABC.? Your broker charges a commission of $7.99 on purchases and sales.? The ?ask price? of ABC, or the price it is selling for, is $23.34 per share.
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$1,000 ? $7.99 = $992.01
$992.01 / $23.34 = 42.5, or 42 shares
You can purchase up to 42 shares of ABC (I do not recommend purchasing fractional shares).
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All online brokers will have a ?Trade? command.? This command will contain options such as stocks, bonds, mutual funds, EFTs and options.? Choose ?Stocks? and select ?Buy?.? Enter the ticker symbol of the stock you wish to purchase and the appropriate number of shares.? Be sure order type is ?Market?, which will result in an immediate purchase of your company at the current market price.? Those who are sensitive to any movements in purchase price can choose a ?Limit? order and stipulate the ask price to buy at, but be aware that with Limit orders your purchase may not happen if your ask is not meet, even if it is only a penny or two away from the market price.? All brokers allow you to review the order for between 30 and 90 seconds.? I stress reviewing the ticker symbol and estimated purchase total during this time; you don?t want to purchase the wrong company.? Confirm your order and you are a proud owner of stock.
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Monitoring Your Purchase
I recommend keeping your portfolio to 12 companies or less.? For the same reason as only buying companies I understand I also like to keep my portfolio easily manageable.? You should always know which companies you are invested in.? Check your portfolio at least once a week and pull up your stocks in Yahoo! Finance or Google Finance at least once per week, reviewing the headlines of your companies for anything newsworthy.? Review your selling price every quarter, updating it as necessary.
A cool feature offered by most online brokers is an automatic buy/sell feature.? I use TD Ameritrade, where they are called ?Trade Triggers??, and I take advantage of these on every stock I buy.? These auto-commands can protect you from missing your exit price.? Using the ABC example above, say you plan on selling ABC at $58.00 per share.? Enroll ABC in an auto-sell command with $58 as your condition for selling; when ABC hits $58 your shares are automatically sold.? This is great for those who occasionally check their accounts or spend hours each day away from their computer.? I set my commands to expire each quarter, which forces me to revalue my holdings and enter my updated selling price as a trigger.? I also enjoy tracking my purchases in a custom Excel Spreadsheet, which allows me to see all my lifetime of purchases, returns, dividends and more in one location.
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Selling
Your stocks will be sold either through the automatic triggers (if enacted) or a process very similar to the buying process described above.? If manually selling you will choose ?Sell? and enter the ticker and number of shares you wish to sell (you will be selling all shares in the specific company).? On manual sells I sell on ?Market? orders rather than ?Limit? orders, although you can argue that my enacted Trade Triggers are really preset limit orders.? During business hours the transaction is completed immediately and the sale proceeds are available for a subsequent purchase.
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Buying and Selling Intelligently
The next education post will help you choose a strategy for selecting stocks and calculating your exit price.
Source: http://valuemystock.com/2012/02/stock-investing-101-3-buying-and-selling-stocks/
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