Types of share trading in stock market
The most common type of trade is called a market order, or sometimes simply a standard order. A market order is an order for a specific number of shares to be bought or sold at the best available price as soon as possible. The best available price is not always the price you will see quoted on a financial website, financial section of the newspaper or the television, however. The prices change constantly and there are different prices for buying shares and for selling shares. The bid price is what a dealer will pay for a security, or what you will receive when selling, while the ask price is the amount for which the dealer will sell shares, or what you must pay when purchasing.
The difference between the two is called the spread. Certain stocks have a wide spread, meaning there is a greater difference between the bid-price and the ask-price, while others have a narrow spread, meaning the prices are quite close together. However, the ask price is always higher than the bid, and more frequently traded stocks, or highly liquid stocks, will have a narrower spread, while less frequently traded stocks will have a wider spread.
Sometimes, you may want to deal shares at a specific price, or know beforehand at what price the shares will trade. In this case, you have the option with most stockbrokers, even online brokers, to place a limit or better order, more commonly called a limit order.
With a limit order, an investor can name a specific price at which they would like to buy or sell a number of shares in a specific equity. In placing a limit order there is no guarantee that the order will be executed at any time. Even if there were shares available at your given price, if there are not enough to fill all of the orders, your order may be too far down in the queue to be filled.
Also, the shares may not become available at your given price at all, in which case the order would also go unfilled. Limit orders may be placed above the current market price when selling shares or below the current market price when purchasing shares.
The expiration date is most commonly the end of the trading day; however, you may often specify an expiration date of sometime in the future usually within 30 days.
Again, if the number of shares at the price you desire is not available, then your order will expire at the appropriate time. Using limit orders can be a great way to ensure you are receiving the price you expect. However, it is important to realize that your order may not be filled at all or it may take some time to be completed. Another fairly common type of order is a stop order, sometimes called a stop loss order.
Similar to limit orders, stop orders are made at a price above or below the current market price of a security. A stop order works in opposition to a limit order. A buy stop order would be placed above the current market price, while a stop sell order would be placed below the current market price.
Sell stop orders are generally the more common of the two types of stop orders and it is used to minimize a loss on a particular equity.
Another key distinction is that a stop order does not guarantee a price like a limit order does. Instead, if a stop price is hit, the order becomes a market order and will be filled as soon as possible at the best available price. Let us take a look at an example of a sell stop order and why it might be utilized. The stop order can also be used to lock in gains. A buy stop order is not often used by the average investor. It is most commonly utilized to minimize losses on short positions or to protect profits when selling short.
Heed advice from forums with a heavy dose of salt and do not, under any circumstance, follow trade recommendations. Study the greats Learning about the greatest investors of years past will provide perspective, inspiration, and appreciation for the game which is the stock market. One of my favorite book series is the Market Wizards by Jack Schwager. Read and follow the market News sites such as Yahoo Finance and Google Finance serve as a great resource for new investors. For in depth coverage, look no further than the Wall Street Journal and Bloomberg.
By monitoring the markets each day and reading headline stories investors can expose themselves to trends, 3rd party analysis, not to mention economic concepts and general business.
Pulling quotes and observing fundamental data can also serve as another good source of exposure. Beware though, over time you may find that a lot of the investing shows on TV are more of a distraction and are overall full of junk recommendations.
This is a natural evolution; you are not alone! Consider paid subscriptions Paying for research and analysis can be both educational and useful. Some investors may find watching or observing market professionals to be more beneficial than trying to apply newly learned lessons themselves. There are a slew of paid subscription sites available across the web, the key is in finding the right ones for you.
View a list of the services I use use myself. Two well-respected services include Investors. Go to seminars, take classes Seminars can provide valuable insight into the overall market and specific investment types. Most seminars will focus on one specific aspect of the market and how the speaker has found success utilizing their own strategies over the years. Examples include Dan Zanger and Mark Minervini.
Not all seminars have be paid for either. Some seminars are provided free which can be a beneficial experience, just be conscious of the sales pitch that will almost always come at the end. When it comes to classes, these are typically pricey, but like seminars, can also be very beneficial. Buy your first stock or practice trading through a simulator With your online broker account setup, the best way to get started it to simply take the plunge and make your first trade.
If trading with real capital is not possible initially, consider using a stock simulator for virtual trading. A variety of online brokers offer virtual trading for practicing.
One of the most common mistakes traders make is to go all-in and try to score big with a full portfolio position out of the gate. This is an often painful mistake and why many new investors suffer big losses early on. Proper portfolio allocation is extremely important.
For more tips of wisdom, see my article, 60 Stock Tips for Investment Success. For the majority, trading will be losing proposition.