What does trading stocks mean?

Buying and selling of stocks is referred to as trading in the financial market.

You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor. Exchange floor scene must be familiar to you; the share market has been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. . The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized.

Electronic transaction is very common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .In online investing your broker will connect to the exchange network and search for a buyer or seller according to your order.

How are the stock prices determined?

The stock prices cannot be predicted, they depend on various factors like political unrest, if there is a huge demand for a particular share at a given time, prices can fluctuate, and any event that could adversely affect the company will also cause the share prices to drop.

Before you decide on which stock to buy you must answer the following questions.

Do you know the company well enough?

What is the company’s reputation in the market?

Have you gone through their annual report?

Do you have the confidence to invest in this company?

Is some negative news about the company circulating?

How are analysts predicting the future?

How is the management of the company?

What are their growth prospects?

Am I aware of the insider activity?

Is it an internationally renowned company?

How is their marketing strategy?

Have there been any changes in the management recently?

How consistent has been their performance?

Has there been a sudden shift in their production?

Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk; risk taking could either lead to fortunate gains or to bankruptcy.

• You should avoid investing money more than you can actually afford.

• Know about your investment well and do not blindly depend upon your broker.

• Follow regular stock market quotes to keep yourself abreast of the market swings.

The share provides you with an earning power, gives you partial ownership of a company and the freedom to buy or sell at any moment. But if you are a novice in stock trading you need to play safe and equip yourself with a lot of information. Unless you are a seasoned player you should invest only after surveying all the alternatives and never go beyond your risk tolerance. Know where to draw the line and begin trading in stocks!

Brokers and Online Trading

Brokers share the undesirable reputation of lawyers, bankers and accountants. They earn a living by selectively sharing knowledge that the general public can't easily access. But, like it or not, they are the individual investor's direct link to Wall Street. Although technology and the internet have made it easier for individual investors to take control of their portfolios, the basic rule still applies: you need some kind of broker if you want to trade stocks and bonds.

In any profession, you will find people who take advantage of those who aren't in the know. Whenever you buy something, there is the possibility of being cheated. Furthermore, with a broker you purchase advice, which is hard to price. But not all brokers fit the swindler stereotype. In fact, there are many brokers who do a phenomenal job of guarding their clients' interests. There are also many discount brokerages that provide remarkable services for a reasonable price. It's up to you to pick the broker that meets your needs. This tutorial will go over some important factors to consider when making the choice. If you are new to the market and don't have a solid understanding of the various securities, check out the Stock Basics, Bond Basics and Mutual Funds tutorials.

What Does A Broker Do?

Brokers are the people who handle customer orders to buy and sell securities. In the same way that a grocery store acts as a middleman between shoppers and the companies that produce food, a broker acts as a middleman between the securities that trade on the market and the investors who buy them. We should also mention that the word "broker" can be used in a variety of circumstances. It could mean an individual person you deal with or it can refer to a brokerage firm such as Global Jockey. To be a stockbroker in the any part of the world, you must pass two licensing examinations. These exams prove that a broker is informed about what he or she is selling and knows all the regulations and laws in the securities industry. Most countries have similar licensing programs. The most important thing to realize is that brokers are salespeople. They get a commission when you trade. This will be our focus in the next section.

The Costs

Opening an Account

Every brokerage has different terms and conditions for opening an account. There is a wide range of minimum deposits, varying anywhere with the cost. Make sure you read the fine print beforehand. There is nothing more irritating than spending the time to fill out application forms only to discover you don't have enough money to open an account.

So, you're not loaded? Don't worry, more and more online brokerages don't require a minimum deposit at all.

Another option for those with small bank accounts is a dividend reinvestment plan. A dividend reinvestment plan allows you to circumvent brokers by buying stocks directly from the companies that offer them.

Commissions and Fees

Every brokerage charges a different price (called the commission) to trade. The price is usually indicative of the service, so cheaper isn't always better.

    * The dirt-cheap brokers who charge $5 to $15 per trade get the job done. Prices are going down all the time and quality is getting better, but don't expect great support or perks.

    * The mid-priced discount brokers typically charge anywhere from $15 to $30 per trade. These brokers generally offer better customer support and additional services.

    * Expensive brokers come with high costs. In some cases you can expect to spend upwards of $100 to $200 per trade. These brokers are known as full-service, and we'll discuss them in greater detail in the next section.

The prices above are a very rough guide. Commissions on trades vary based on things like the type of trade (e.g. market order versus limit order). Even the method used to do the trade affects the price; commissions are different for online orders, touch-tone phone trades and broker-assisted trades.

The Hidden Fees

In general, the financial industry is excellent at hiding fees and charges under a layer of jargon. Beyond the commissions per trade, look for the following:

    * Fees for transferring assets both into and out of an account

    * Account maintenance fees

    * Inactivity fees

    * Fees for not maintaining a minimum balance

    * Interest on margin loans

    * Sales charges on certain securities (e.g. loads on mutual funds)

Make sure you shop around, but bear in mind that many of these fees are standard across the board.

Full Service or Discount?

Full-Service Broker

The full-service category includes all the names that spring to mind when we think of brokers: Global Jockey, p2m Infotech and others. They provide a variety of services, such as personal advice, retirement planning and tax tips. Full-service brokers offer a wider selection of investment products such as derivatives and insurance, as well as access to the company's research. All this comes with a hefty price tag. Full-service brokerages are expensive, with commissions around $150. Furthermore, full-service brokers are compensated based on how much you trade, not the performance of your portfolio. This can lead to your full-service broker advising you to trade when you don't need to. When this becomes excessive, it is called churning.

Discount Brokers

Discount brokerages charge a reduced commission and do not provide investment advice. The best-known discount brokers are p2m Infotech. Fees are kept low because discount brokers offer fewer products. Brokers are paid on salary and not on commission. The business model is built on having an effective system and quality service in order to put through the most volume.

Online Brokers and a Blurring Industry

A few years back, some spoke of a third category of brokerage - those with online trading systems. Today, hardly a discount broker exists that doesn't offer online trading. Trading over the internet has definitely benefited the self-directed investor. Commissions have been reduced and individuals exert greater control over their accounts. Online trading has affected the industry by blurring the line between full-service and discount brokers. As discount brokers become increasingly common, they are providing access to high-quality research, while the old-school full-service brokers now offer online trading options as well.

Choosing a Broker

What's Your Style?

Deciding whether you need full-service or discount is your first step. The choice is up to you, but taking charge of your own portfolio can be a very rewarding and profitable experience.

On the other hand, full-service brokers also have their time and place. Although you'll pay more, losing money on commissions is better than wiping out your portfolio because you don't understand the market. The bottom line is that the type of broker you choose should be based on your individual needs.

Check the Background

The next step is to check the background of the firm and/or broker for any past disciplinary problems.

Securities regulators have made this information relatively accessible through the Central Registration Depository (CRD), a disciplinary and employment database available from NASD Regulation. You can perform online searches on the p2m Infotech website for certain information and request that a detailed report be sent to you.

Accounts and Orders

Types of Accounts

Depending on what type of securities you hold, there are four major choices you have when opening an account:

Cash Account: The basic account where you deposit cash to buy stocks, bonds, mutual funds, etc.

p2m Infotech Account: For people looking to set up an individual retirement account.

Margin Account: Margin basically allows you to borrow from your broker against the cash and securities in your account. Profits can diminish quickly when you use margin, so be very careful! Learn about how this works in our Margin Trading Tutorial.

Option Account: Only seasoned investors should consider this choice. This type of account allows you to trade options, which are much riskier investments than stocks or bonds.

If you already have a brokerage account and wish to move it to another broker the process is quite easy. Just contact the brokerage you are signing up with and they will either do the paperwork for you or help you with the proper forms.

I'm ready to trade, now what?

In order to make your trade you have to be specific about how you want the transaction to be performed. The following are common order types you'll encounter when placing an equity order using an online interface or the phone:

Market Order: An order that requires immediate execution at the best price available. These are generally the cheapest trades to place because there is little work or maintenance required by the broker.

Limit Order: An order to transact at a specified price. This guarantees the price at which you will buy or sell a security. Limit orders are usually more expensive than market orders.

Stop Order: A market order that trades after a specified level has been reached. This may be a stop-loss or stop-limit. The exact price cannot be guaranteed, but this can be a good way to protect your downside.

All or None (AON): A stipulation on a limit order either to buy or sell a security only if the broker can fill the entire order, not part of it.

Day Order: An order that expires at the end of the business day if it has not been filled.

Good till Canceled (GTC): An order either to buy or to sell a security that remains in effect until the customer cancels it or until it is executed by the broker.

Fill-Or-Kill: An order for immediate execution. If it cannot be filled immediately the order is automatically canceled.

Short Sale: Short selling is an advanced investing technique in which stock is borrowed and sold with the hopes of returning the stock at a lower price.

Buy to Cover: An order placed to close out a short position

Conclusion

One of the most important investment decisions you will make has nothing to do with which stock, bond or mutual fund you buy. We're talking about selecting a broker. Hopefully the information in this tutorial will assist you in your search.

Let's recap:

    * Brokers are the people who handle customer orders to buy and sell securities.

    * Don't forget that a broker is a salesperson.

    * Minimum balances required to open an account range from thousands of dollars to nothing at all.

    * All brokerages charge commissions to execute orders. This fee varies widely depending on the type of brokerage.

    * Look out for hidden fees for transactions like the transfer of assets or inactivity.

    * Full-service brokers offer much more, but they're expensive.

    * Discount brokers don't offer the extras, but they're affordable.

    * Online brokerages have changed the industry by lowering costs and blurring the line between discount and full-service.

    * The type of brokerage you require depends on your investing style.

    * It's possible to check the background of all brokers and firms.

    * The type of account you need depends on the type of securities you want to hold.

    * There are many ways to execute an equity order.