Buying / Selling shares
To buy or sell shares of stocks, bonds ETFs, etc., an account with a stock broker is required. The internet has opened up the stock market sand box to us regular peeps, with the creation of online brokers. A person can even control their own retirement account(s) by using online brokers!
My first buying and selling of shares, or “trades”, were placed through an online broker called Zecco. They used to offer 10 free trades per month if an account was opened with $2,000. They changed the free trade requirement minimums, and now I do not qualify for them, so I opened an account at Trade King.
The reason I chose these brokers is I looked for lowest possible transaction cost, since I do not need all the other “fluff” many online brokers offer. The variety of online brokers gives people a good choice, depending on their buying, selling and hand holding needs.
After doing some “paper”, or “fantasy” trading / investing using Yahoo! Portfolios, choose a broker, setup an account, put money in, and buy some shares!
I Restrict my stock buying to shares that “trade” at least 500,000 shares on average. “High volume” stocks are easier to purchase and sell. To better understand this, check out Burlington Northern Sante Fe Railroad. The right column of statistics has a line that says Avg Vol (3m):. BNI’s average daily volume was over 2 million shares when I typed this, which means it would be very easy to buy or sell this stock.
Basics to know:
There are two primary types of accounts with brokers, CASH and MARGIN. They are detailed below.
PLACING A STOCK ORDER: It is difficult to describe this, as every online broker has unique screens for filling out the actual order page. This PDF file has details from a popular discount broker on order types and how to place an order for a stock. The minute details can vary slightly between brokers, and some might not allow all types of orders. Check the with broker you chose.
LIMIT ORDER / MARKET ORDER – These are the two most common types of orders, when buying or selling. The safest one to pick is limit order. More details can be read in the investopedia links below.
The quickest way to get the hang of buying and selling would be to buy one share of something, and see how it works. The total cost to learn this way would be the price of the share, and commission. Wait until the next day to sell it though, due to “Pattern Day Trader” rules (read farther down).
PER TRADE – This is a generic term used by brokers for actually buying and selling stocks. Every time a transaction is made – purchase or sale of shares is called a “trade”.
Investopedia has great articles on buying and selling stocks:
The Basics Of Order Entry
Understanding Order Execution
Something to consider / remember – If I have $1,000 in an account for buying stocks, I should subtract the total cost of buying / selling. Say broker commission would be $4.95 to buy, and $4.95 to sell. That would leave me with $990.10 to buy shares of a stock. To buy / sell seven different stocks = $69.30 reserve, $930.70 available to buy/sell. There has to be money available in the account to cover the commissions / fees. It would be really good to always have at least a $20 reserve, just in case. Add $20 to whatever amount I start out with, and buy / sell like that $20 is not in the account.
There are two types of trading / investment accounts that I know of to buy / sell stocks:
CASH – With a Cash account, I can only use the exact amount of funds I place in the account to trade with. When a stock is sold, it will take several days for the funds to become available for re-use. Federal regulations require a set amount of time to “settle” the transaction, not the brokers. This type is fine for longer term focused people, like investors.
MARGIN – This type of account is mostly beneficial to shorter term traders, but ok for long term investors too. There is no harm to sign up for a Margin account, even for long term investing. With a Margin account, the funds from a sale are available almost immediately for re-use to buy something else, making it quicker to put the funds back to work once a sale is made. This does not mean the funds from the sale will be available for immediate withdrawal, or transfer out, just for re-use in buying. This might vary by broker, check with the chosen broker. It is likely easier to have this type of account from the beginning, rather than attempting to switch from a cash to a margin account in the future.
With a Margin account, the broker actually fronts you more money to trade with. Deposit $2,500 in a Margin account, and available “trading” or “buying power” funds might be up to double, or $5,000. Now, if I use up the money I deposited, and dip into the Margin funds to buy stocks, I am BORROWING money from the broker. They charge interest on their borrowed money too. I type from experience about the stress a newbie can set upon them self when trading on Margin money. I strongly urge newbies *NOT* to exceed the amount of money they start with (deposited). I truly thought I was going to have a stroke when my first trade using Margin money went bad. I panicked, and bailed out of all my positions just to make sure I had funds to cover possible expenses.
You do not have to learn the hard way. I did that for you. With a Margin account, restrict buying to amount of funds deposited.
PATTERN DAY TRADER
NASD Notice regarding “Pattern Day Trader” (PDF file)
I have read so many arguments about this in financial forums. Why people nit pick this rule is beyond me.
Me language (k.i.s.s.) on what I read about “Pattern Day Trader”
* Day trading is when a stock is bought and then sold on the same calendar day. The best way for me, as a newbie, to avoid potential distress over this rule is not to buy / sell on the same day unless absolutely necessary, like if a mistake was made placing the order. A person needs to have $25k, PLUS trading funds, in the account to day trade on a regular basis without regulations causing hassles.
* Make 4 day trades in 5 business days – “Pattern Day Trader”
* Make ONE day trade, and make NO other trades in 5 business days, this is more than 6% of total trading activity for 5 business days. The Feds consider this a “Pattern Day Trader”.
Since they do not specify in the rule, the feds must mean 5 consecutive business days.
It is a bummer that I cannot day trade with my own cash without having a huge reserve, but the Feds make the rules, not the brokers.