Whether you’re day trading, swing trading or investing, you need to know the basics on how to buy and sell stocks.
What is a Stock?
A stock (also called an “equity” or a “share”) is a security that represents an ownership share in a public company that is listed on a stock exchange like the New York Stock Exchange (NYSE) or the Nasdaq.
Companies usually issue stocks to the general investing public in order to raise additional funds to invest in their business, pay off debt, or launch new products/services.
A person who owns stock in a company is known as a shareholder and is eligible to claim part of the earnings and residual assets of that company.
For shareholders, stocks are a way to outpace inflation and grow their money over time.
Stocks don’t usually have a fixed price; they change each second of each day because of supply and demand.
How Investors Earn Money from Stocks
The idea behind buying stocks is to invest in solid, well-managed profitable companies. If a company succeeds on those fronts, there is a good chance that its stock price will keep growing in value.
The stock market is often driven by expectations of profits or corporate earnings.
Oftentimes, investors bid up the price of a stock if they believe the company’s earnings are high or will rise further.
One way that investors make money in the stock market is from selling stocks at a higher value than they were bought.
If a public company fails to do well and its stock decreases in value, people who have invested their money in the company could lose part or even all of their investment when they dispose their stakes.
How to Buy and Sell Stocks
Now that you understand what stocks are, you may ask the question: how do you actually buy and sell a stock? Well, you can start trading shares by using the following steps.
#1 Open an online broker account
Stock traders most commonly buy and sell stock through online brokers. Firms such as E-Trade, Charles Schwab, and TD Ameritrade offer brokerage accounts that can be managed online by investors.
So, your first step should be to find a good online stock broker and open an account. You can set up an account by depositing funds in your brokerage account.
You will then need to familiarize yourself with the layout of the trading platform, educational tools, and the stock-trading guidance offered by your broker.
#2 Decide what stocks you want to buy or sell
Once you’ve opened and funded your account, the next step will be to tell your broker how many and what types of stocks you would like to trade.
One important thing you need to keep in mind when determining what stocks to buy or sell in your new account is that you should not put all your eggs in one basket.
By this we mean that diversification is a great idea and you should not put all of your money into just one stock.
The rise of commission-free trades has significantly reduced the cost of trading stocks, which is why you need to take advantage of it by buying just a few shares of several different companies with a relatively small amount of money.
To determine the number of shares you should buy, first figure out the amount funds you need to invest in each stock and divide that amount by the current share price of that stock.
You can find this by either running a search for the company on your brokerage trading platform or searching the stock’s ticker symbol.
After picking the stocks that you want to buy, you can either make a “limit order” or a “market order”. A limit order is one in which you buy a stock at a limited price, while a market order is where you request to buy a stock at the prevailing market price.
Difference between a day trade and long-term trade
Day trading is a type of stock trading in which traders buy and sell stocks or other securities in short periods of time (seconds or minutes). In other words, day trading is the buying and selling of shares in such a way that at the end of each day the trader has no holdings.
As long as there is volatility, day traders can earn money in the stock market by buying stocks when they fall in value and sell them off when the drop in price.
Long-term stock trading, on the other hand, involves making buy-and-hold trades that remain open for months and often years. These are buy-and-hold trades, rather than quick, buy-and-sell-trades.
The difference between day trades and long-term trades is that day trading consists of making quick, buy-and-sell-trades without getting concerned about the fundamentals of the company or even what it does, while long-term trades involve betting on the company by making buy-and-hold trades that remain open for months and often years.
Bottom Line
Buying and selling stocks comes in the form of investing and trading. Day traders typically only hold shares for short periods of time and don’t care if the overall stock market rises or falls.
Long-term investors, on the other hand, consider the current and future performance of the company and look towards a longer time frame.
With online stock brokers and cheap trades on the rise, trading stocks is becoming exciting. However, it is important to remember that although starting to trade stocks is easy, being successful is another story.
You will need to first learn some of the things we have discussed in this article so your entry into the world of stocks goes as smoothly as possible.
You will also have to keep up with the latest headlines out of your companies by subscribing to news alerts and going through quarterly reports.