How To Research and Trade Stocks

Make a decision; conventional or online trading.  If you don’t plan on making your own investment decisions, then a conventional brokerage account is recommended.  With a conventional brokerage account, you will have access to a broker, aka an account executive.  Your broker will make investment decisions for you based on the size of your investment and your long-term goals.

Almost every major brokerage house now offers online trading.  If you have the knowledge and the stomach for making your own stock trading decisions, then an online trading account might be the way to go.

Online stock trading is done electronically through a web based trading interface.  Online accounts provide many useful tools for research, including charting and company profiles.  The tools vary from firm to firm. 

Be sure to evaluate the policies, commissions and fee structures for any account you open as they can vary widely.  My preference is a firm that charges reasonable commission rates for trades and offers a wide range of services including the ability to transfer funds between money markets, checking and savings.

Open up that brokerage account.  All stock transactions are processed through a brokerage house.  To buy and sell stocks, you must open up a brokerage account and deposit funds into that account before you can buy or sell stock.  After deciding whether you prefer an online or conventional trading account, you can begin the process of opening an account.  Opening an account is easy.  After deciding which brokerage house best suits your needs, just follow the links to open an account on their website.

Identify long-term investment goals.  One of the worst investment decisions that inexperienced investors make is not having a clear understanding of why they are investing in the stock market in the first place.  Building wealth for retirement is not the same as trying to take advantage a short-term fluctuation in an individual stock or the overall market.

Know the risks of stock trading.  Most risks are disclosed in the account registration process, unfortunately, people are usually too lazy to read through the disclosure statements.  Bottom line is this:  Although the potential to make money is there, in the worst-case scenario, you can lose all or most of your initial investment, too.

Learn the basics of stock price quotes.  Compared to commodity futures, understanding stock price quotes is easy.  Prices are quoted in dollars and cents per share.  Fractions are often used as cent prices, but they are standard US decimal equivalents.  ½ equals .50 cents, ¼ equals .25 cents, etc.  If you know how to convert fractions to decimals, you can easily understand stock price quotes.

Learn the basics of stock research.  There’s an old saying, “The trend is your friend.”  Recognizing trends in individual stocks, human behavior and economics can be one of your most valuable assets.

Learning how to read a company’s annual report, understanding price earnings ratios and following Industry and individual company news reports is very important before making any long-term investment.  This information is available with an Internet connection and a click of the mouse, so use it.

Find out whether company executives have recently bought or sold large blocks of stock.  Rule 144 requires all stock transactions of company executives be disclosed to the public.  If company executives have recently bought stock, it might be because they are privy to information that may be bullish for the company’s future.  On the other hand, stock sales by company directors may be considered a sign that hard times are ahead.

Learn the basics of stock order types.  Most investors use one or more of the following order types when trading stocks.  Learning when and how to use the right type of stock orders will make you a more effective investor and probably save you from making poor trading decisions which can cost you money at the time of execution.  Below you will find basic descriptions of common stock trading orders.

• Market order to buy or sell – The market order is an order executed at the current market price.  For online investing, the price is determined based on the current bids and offers in the electronic market at the time the order is placed.  The same is true for floor traded stocks, except they are executed on the floor of the exchange.
• Limit order to buy – The limit order to buy is placed below the current market price of the underlying stock.  If the price of the stock moves down to the limit price, the trade is likely to be executed at that price, but there is no guarantee of execution as liquidity and market volatility may prevent the execution of the order. 
• Limit order to sell – The limit order to sell is placed above the current market price of the underlying stock.  If the price of the stock moves up to the limit price, the trade is likely to be executed at that price, but as noted in the limit order to buy description, it depends on factors such as liquidity and market volatility.

Learn how to cut losses and take profits.  Nothing feels worse than watching a stock tank and seeing your investment disappear into a black hole.  When it’s your own hard-earned money on the line, trading can be a very emotional experience.  Set a point where you feel comfortable about your losses, but live to trade another day.  

On the plus side, it’s also important to know when and how to take profits.  The street is littered with stories of paper profits that were never realized because of greed and emotion.  Pyramiding is a common exit strategy, whereby profits are taken by selling portions of your investment as the price rises.  This enables you to lock in profits while still maintaining an active position in the market.

Being a little tax savvy doesn’t hurt either.  Remember there are capital gain taxes when profits are taken.  Also, knowing the difference between long- and short-term capital gains and the treatment of losses is a must.  Make sure all your yearly stock transactions are included in your tax return.