Stock Trading 101: Trading Basics

May 6th, 2012

So you have a little money that you’ve set aside for trading stocks (or maybe a lot; lucky you!) and you’re all ready to dive into the market, or are you? What are stocks? How do you trade them? Where do you trade them? How do you make money? In this post I will provide the answers to all of these questions and make sure you are prepared to start making money in the stock market!

What are stocks?

Stocks are securities that represent ownership in a corporation, which is why each stock is called a share. Each stock you own represents your share of the corporation.

Where do you trade stocks?

The stocks themselves are traded on different exchanges, such as the New York Stock Exchange (NYSE) and NASDAQ. You, as a trader, will be using a stock broker. The broker puts in the orders to buy and sell stock for you and executes them, taking a small commission on each trade (usually between $4-$10). Visit the stock brokers section of the site for more information and reviews of different brokers.

How do you trade stocks?

As explained above, the actual order will go through your stock broker, but what I am going to explain here are the two different ways you can trade a stock. You have to make a decision on whether you think a stock is going to go up or go down.

Long Position: If you think a stock is going to go up you will be buying the stock and taking a long position. When the stock goes up to your desired price you will then sell it and take your profit. If you sell it at a lower price than you bought it you will obviously take a loss.

Short Position: If you think a stock is going to go down you will sell a stock short and take a short position. When the stock goes down to your desired price you will buy to cover and take your profit. If you buy to cover at a higher price you will take a loss.

What are the bid and the ask price?

These are the current market prices for the stock. The ask price is what shareholders that are selling the stock are asking for the stock. If you want to buy the stock right this moment, this would be the price you have to pay. The bid price is what shareholders that are looking to buy the stock are willing to pay. If you wanted to sell your stock right away, this would be the price you would sell it at.

What are the different types of orders?

When you are placing a trade with your broker you will have different options as to what type of order you will be placing. Not only can you buy, sell, sell short and buy to cover, but you can also decide whether you will be placing a market order or a limit order.

Market Order: A market order is an order that will execute at whatever the market price is. If the stock you are selling is trading at $1.02 and the bid is $1.00, your trade will execute that moment at $1.00. The same is true for buying. If the stock is trading at $1.02 and the ask is $1.05, your trade will execute at the asking market price of $1.05.

Limit Order: A limit order is where you set, or limit the price you would like to buy or sell your stock at. So if your stock is trading at $1.00, but the ask price is $1.05 you can place a limit order in to buy the stock at $1.00 and it will not execute until the ask is $1.00. If you were to buy this stock at $1.00 and wanted to sell it at $1.10, you would place a sell limit order and when the stock reaches $1.10 and the bid is the same your trade will execute bringing in a nice 10% return for you!

*99.9% of the time I use limit orders. Especially when trading lower priced stocks. Every penny is 1% when trading a stock that is a $1.

So how do you make money from stocks?

I know you’ve been waiting for the answer to this one, and the answer is simple. You either take a long position, buy a stock low and sell it high or take a short position and short sell a stock high and buy to cover at a lower price.  In order to accomplish this task you have to do your research and analyze the stocks. There are two ways of analyzing stocks. They are called fundamental analysis and technical analysis.

Fundamental Analysis: Is when you determine a company’s value by researching and evaluating financial statements. Is it worth more than it is currently trading? If you think so buy it!

Technical Analysis: Is when you use charts to determine a stock’s future activity. There are many different patterns that traders look for to indicate whether a stock will go up or down. This is the way I like to analyze my stocks, because a lot of the stocks I trade either aren’t really worth much or their financials are terrible, which gives you nothing else to look at than their charts. It is a self-fulfilling prophecy because other traders are looking for the same indicators. When we all think a stock is going to go up and we all start buying, guess what? It goes up! The opposite is also true. For more information on technical analysis and details on what to look for and various chart patterns, visit the technical analysis page in the getting started section of the site.

While you are still learning it is also good to watch others’ stock picks. I will be posting stock picks here on DayTradingDummy.com that will include stocks charts, reasons for buying or shorting, as well as results. I recommend you subscribe via email for free daily stock picks and updates.

If you are also interested in viewing stock picks of other successful day traders I would recommend signing up for TimAlerts from Timothy Sykes or FousAlerts from Cameron Fous. Tim turned his $12,000 bar mitzvah money into $1.65 million in just over 2 years, buying breakouts and shorting penny stocks. Cameron Fous is a trader from California who primarily buys rebounds and breakouts. He is up over $297,000 since January of 2011. These are both very successful traders whose trading activity is tracked and verified. If you are interested in following their trades you can do so via these links: TimAlerts and FousAlerts .

Posted in Getting Started