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Be A Better Stock Trader By Understanding Some Stock Trading Fundamentals

May 16, 2008
If you have money to invest, you can buy and sell stocks. There is a specialized vocabulary for stock trading, but once you understand the fundamentals, you will have a better feeling for how the market works. It's just as true for stock trading as it is for any investment: The more you know, the more successful you are apt to be.

Usually stocks are traded through brokers, who act as intermediaries, taking and fulfilling orders. "Full service" brokers also can recommend which stocks to trade and give advice about the state of the market. These brokers charge higher commissions. In order to save money, many people work with discount brokers, who charge considerably less. Discount brokers don't provide advice, but some investors consider this a plus.

Broker services may include online trading and broker-assisted trading. Some have options for placing telephone or online orders, such as Interactive Voice Response Systems for telephone orders and wireless trading systems that allow buyers to place orders from their web-enabled handheld devices or cell phones.

Some brokers give you a password that allows you to access their order department through their websites. Others have their own software for Internet orders. No matter what system is used, in most cases a number of charting options are offered to help you track movements on the stock market. Also, some services may include analysis software or offer it at additional cost.

Different kinds of orders are made when selling or purchasing stocks. A "market order" gives instructions to buy or sell at the current market price. The order is usually executed at a price very close to what you are quoted when you order. Sometimes, however, there can be a difference between the quoted price and the transaction price. This usually happens when the stock price is fluctuating or if the stock in not actively traded.

If you want to buy or sell at a definite price, whether above or below the current market price, you can place a "stop order" or a "limit order." The stop order tells the broker to trade the stock at a specified price, and the limit order calls for the broker to trade at the specified price or better.

Stop orders are designed to limit losses and protect profits. They go into effect when the market reaches the stop price, but may actually trade higher or lower than the stop price because they are traded at market price after they become active. At times, limit orders are not placed at all, even when the market has reached the limit price. This happens when the market moves quickly and there is not enough time to execute the order before the stock prices goes below the limit price range.

To illustrate: You purchase Bell Canada (BCE) for $50 a share, and then put in a stop order of $45. If the price falls to $45, the stop order goes in effect, and the BCE stock will be sold at the market price. On the other hand, if you place a limit sell for $60 after purchasing BCE, your stock will be sold at a profit when the stock price reaches that amount. Also, you might purchase BCE with a limit buy order for $45. This theoretically would let you buy the stock at a price lower than the current market rate ($50 in this example). If the price never falls to the limit buy price, though, you will not buy any of that stock.

An order can be designated as "good till canceled" (GTC) or as a "day order." As their names suggest, GTC orders remain in effect until they are canceled, and day orders are only good until the end of the market day.

Typically stocks are traded in multiples of 100, which are called "round lots." When other amounts are traded, they are called "odd lots." Odd lot orders are somewhat more difficult for trading software to handle, although both types of orders can certainly be accommodated.
About the Author
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