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So You Think You Can Trade Stocks?

Aug 17, 2007
What does it actually mean to trade stocks? This was a question that I had in high school that no one could suitably answer for me. Barring a great at-home financial education, high school is probably the first time most of us consider what it would be like to trade.

Most senior classes have an economics program that has a unit on the stock market, and some even allow students to trade stocks on paper. This was my experience, and I thought I had a great strategy to trade. However, there were many myths and misconceptions that needed to be dispelled before I could actually begin to trade stocks.

Many newcomers and novices are unaware of some basic facts about the markets, and are afraid to ask. Worse yet, supposed authority figures oftentimes don't even know the answers. This article is intended for anyone who would like to trade but has always been afraid to ask these simple questions.

What Does it Actually Mean to Trade Stocks?

In economics class, my plan to trade was simple, and "guaranteed" to make money (or so I thought). I found the "cheapest" (lowest price) stocks I could find in the newspaper - preferably around $1-2 per share - and looked for ones that were near their 52-week low. My strategy was to buy these stocks in huge volumes, and then sell them whenever they ticked up by a measly 1 percent.

For example, if I could buy 10,000 shares of a $1 stock, it would only have to go up $0.01 for me to make $100! Sure, the stock could go down, but what were the odds that a $1 stock would never see $1.01 again? I would just hold on to it until it hit $1.01 (or higher) and then sell. Oh, if only it were that simple to trade stocks.

There Are Commissions When You Trade Stocks - Both Buying and Selling

I knew that you were charged a commission to trade, and I factored this into my strategy. However, none of my teachers could tell me exactly what a "trade" was. I assumed that a trade was exchanging one stock for another - exchanging one thing for another is the definition of trade, after all.

But I had a sneaking suspicion that you might be charged to trade when you bought and when you sold, and of course, I was right.

Don't be confused by the term "trade." We normally don't think of making a purchase at the supermarket as "trading." We think of swapping an old TV for a newer bicycle at a garage sale as trading. But whenever you make a purchase, you are actually trading money for an item - and this is the definition of trading that matters when you want to trade stocks.

So the first flaw in my strategy was my underestimation of commissions. Instead of $15 roundtrip, it would be $30 to get in and out of my trade. That reduced my profit from $100 to $70. But it would get worse!

The Bid/Ask Spread When You Trade Stocks - The Silent Killer

When you trade, there is also something called the bid/ask spread. This means that the price to buy a stock is higher than the price to sell it at a given time. Market makers trade stocks from their own accounts in order to provide a fluid market, and this is their way of making money.

When you trade stocks of $1 companies, this can be a real killer. Since these companies are normally less liquid than big firms like Microsoft or GM, their bid/ask spreads are wider. So the $1 stock might cost you $1.03 to buy and yet you could only sell it for $0.97.

So much for my early plans to trade. Hopefully, this article answers some questions for you. If a strategy to trade stocks seems too good to be true, then it probably is.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at So You Think You Can Trade Stocks (All is Free)
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