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Stock Market Trading Education

by Ron Bechtel

Overview

Once a financial tool reserved for the wealthy, trading stocks is now the investment of choice for today's average American. With the explosion of online discount brokers, reduced commissions and banks paying historically low interest rates on savings, more first-time investors are entering the stock market than ever before. As you consider your investment options, it is important to have an understanding of basic trading fundamentals and the risks involved before you jump in.

Stock Market Trading Education
Stock

All publicly traded companies are owned by shareholders. When you purchase stock in a company, you are purchasing a part or "share" of that business. As the company becomes more profitable, your stock increases in value. But with ownership, comes risk. If the company fails to make a profit or loses money, each share you own may drop in value below the price you paid for it, leaving you with a potential loss. (See Reference 1)

Bid versus Ask

When you purchase a stock, the market will quote a bid price and an ask price. The bid is the price you would get if you were to sell stock you already owned. The asking price is higher. This is the price you would be required to pay to buy the stock. The price gap between the bid and ask is the profit made by the market maker at the exchange. (See Reference 1) This is separate from a brokerage commission.
Market versus Limit Order

When you trade stock, you must designate the type of order it is. Most trades are "market orders" which means you are willing to pay the prevailing asking price for the stock as determined by the market maker. When you place a "limit order," you must specify the maximum price you are willing to pay for the stock. Unlike a market order, a limit order does not guarantee that you will get the stock, but it does limit the amount you will pay. More experienced investors also use stop orders. These rules also apply when selling a stock. (See Reference 2)
Opening an Account

To open an account, you will be required to provide basic identification information, much like you do when opening a bank account. If you feel you need the advice of a professional broker to choose your stocks, then you will open a standard account. The broker will make the trades on your behalf while charging a commission fee, usually about $45 per trade. However, if you are confident enough to make your own trading decisions and have access to a computer, you can save considerable money by trading your stocks online, often for as little as $4.85 per trade. (See Reference 3)
Trading

Whether you are using a broker or are making the trades yourself, you must decide your personal level of risk tolerance. If you are a conservative investor, adverse to risk, you should stay with stable stocks that have minimum price movement, some paying dividends as high as 11 percent. If you are a more aggressive investor willing to take more risk for potential greater return, you might chose stocks with more drastic price fluctuations. Regardless of which type of trader you are, it is important to remember that all stocks carry some degree of risk. (See Reference 1) For a listing of the top on line brokers, visit Baron's website at online.barons.com.