How to buy and sell stocks
Buying and selling stocks can be a way to help build your nest egg or even a way to make a living. It can also result in a significant financial loss. This how-to will offer some ideas for investing as safely and profitably as possible.
Decide how much you can afford to risk.
In addition to a stock portfolio, it is wise to have cash assetts such as CD’s and savings accounts. Be sure that you have a sufficient emergency fund in addition to what you plan to invest in your trade account.
Note that if you will be trading on margin, you will need to have a cash reserve that you can tap in the event of a margin call. This account should be separate from the funds you maintain for other needs such as medical treatment or home repair.
Choose a brokerage account.
According to consumerresearch.com, Fidelity was rated the best online broker overall, while Trade King was rated best discount broker. Thinkorswim.com is the best online broker for active traders, especially those who specialize in options. Choosing the best brokerage service for you means finding a combination of reasonable commissions and helpful analysis tools. Sometimes a brokerage will allow you to download a free trial of their software without opening an account. Take advantage of these offers and shop until you find the right brokerage for you.
Decide on a time frame for your trades.
Your strategies will be determined in part by how frequently you wish to trade. If you like the idea of making decisions on a daily basis, then you will employ an active portfolio strategy. On the other hand, if you hope to set up a portfolio that you will only monitor every few weeks, you will follow something more akin to a buy and hold strategy.
Active traders often rely on technical analysis as well as financial news to make decisions. If you plan to be an active trader, you will need to become an expert in active trading strategies. As you are reading and learning, try testing your strategies by back testing and paper trading. Note that the thinkorswim software makes both back testing and paper trading easy.
If you plan to trade less frequently, you will need to find stocks with solid fundamentals. Dividend yeild is important as is the overall financial health of the company. The msn.com stock research wizard will help guide you through the process of researching a company.
Consider options strategies.
If you want to take a bullish stance on a stock, writing a short put may be a better choice than purchasing the stock. Note that selling short puts results in a highly levered position and should be attempted only by traders who fully understand the risks. Never sell a short put on a stock you can’t afford to buy.
If you buy a stock and want to hedge against a price decrease, you may consider buying a protective put. A protective put, in essence, is «stock insurance». If the value of the stock declines below the strike price of your protective put, you can sell the stock at the strike price. This strategy will cap your maximum loss, even if the stock goes to zero. Like all insurance, protective puts require you to pay a premium, so you are also decreasing your profits when you use this strategy.
In order to earn some extra money on a sluggishly performing stock, consider writing a covered call. This strategy will cap your profit if the stock increases dramatically, but will help you earn modest returns if the stock stays at its current price.
Other options strategies include calendar spreads, iron condors, butterflies, straddles, and strangles. These strategies are beyond the scope of this how-to.
ETFs (exchange traded funds) are stocks comprised of various securities all bundled together and managed as a fund. Buying an ETF allows you to take a position on a sector, commodity, index, etc. without having to choose just one stock. For example, if you are bullish on gold, you could purchase the SPDR Gold Shares (GLD) rather than taking a position on an individual company, such as Yamana Gold (AUY). GLD is constructed specifically to track the price of gold bullion, and is therefore not affected by potential problems that can plague an individual company, such as chanes in management or negative rumors.
Other interesting ETFs include USO, the U.S. Oil Fund ETF; QQQQ, the NASDAQ index tracking stock; and VWO, the Vanguard emerging markets ETF.
So-called «bear market» ETFs can be used to take a bearish stance without actually shorting a stock. An example of a bear market ETF is SCO, which is constructed to correlate negatively with the Dow Jones AIG Crude Oil Sub-Index. On days when Dow Jones AIG Crude Oil Sub-Index declines, SCO will increase in price. SCO is also an example of a levered ETF; SCO will increase at twice the rate the Dow Jones AIG Crude Oil Sub-Index decreases.