Investing In The Stock Market

Penny stock trading is a popular form of trying to make money with stocks.  Since penny stocks are priced very low, small movement in their prices can lead to great changes in the total value of a position.  For this reason, they are popular with day traders, since volatility is needed to make a good short term profit.

As with any sort of intra-day trading, it is very important to keep costs low.  If you are entering and exiting multiple positions in a short amount of time, it is crucial that you spend no more than necessary on commissions, as you will be shocked at how fast these can all add up.  Keep more of your money to yourself, and select a penny stock broker with the lowest commissions possible.

Another potential issue when it comes to fees is that many brokers will charge a premium for trading stocks under a certain cost per share, or at a certain volume.  Since penny stock trading consists of buying a high volume of very cheap stocks, this can form a problem.  Be sure to find a broker that does not charge a premium for trading penny stocks if at all possible.  You may have to read the fine print to figure this out, but it’s worth it in the long run.  Those small fees will eat into your earnings over time.

photo credit: ♦ Kris ♦

Once you have the fees sorted out, it’s time to consider some other factors.  As with any sort of day trading, speed of execution is critical.  You want your orders to be carried out as soon as possible after you place them.  The best way of figuring out the responsiveness of a given broker is by reading reviews online about how well they execute your orders.  Most of them will advertise good times, but there are no guarantees.  This is one area where doing your homework will pay off well.  You don’t want to be stuck holding a bad position longer than you want to because the broker didn’t execute your order quickly.

So, this covers the very basics of choosing a penny stock broker.  There are other features that help differentiate different brokers, but the ones listed above are by far the most critical.  If you’re going to be trading penny stocks, you can’t afford to ignore these issues and let costs eat up your earnings.  Play it safe, do your homework, and find the right brokerage for you.

This article will teach you the basics of buying and selling stocks.  This isn’t complicated, but not knowing how the process can be a big barrier for many people getting started.  Ramit Sethi writes about how small barriers are your enemy.  One common type of barrier is a knowledge barrier.  In the case of stock market investing, not knowing how to buy and sell stocks might form an insurmountable knowledge barrier that would stop you from getting started with investing, which would be quite sad.

Fortunately, the basic trading of stocks is pretty simple.  In this article, I will cover the process of finding a broker, funding your account, and placing basic buy and sell orders.  After you are finished reading this, you should know everything you need to go out and begin investing in the stock market.

Finding A Broker

photo credit: Perpetualtourist2000

In order to begin trading stocks, you will need a stock broker of some sort.  Back in the day, this meant breaking out your yellow pages and calling around until you found a broker you could work with.  This broker would not only buy and sell stocks for you, but also give you advice.  For most people, those days are over.  If you’re reading this article, you probably have some sort of do it yourself ethic.  Fortunately for you, the invention of the internet and online discount brokers have made do it yourself investing a snap.

An online discount stock broker is an organization that can place buy and sell orders on your behalf in exchange for a small commission.  These commissions are quite small compared to conventional brokers, typically on the order of $7-$15 per trade, depending on the type.  There are many discount brokers to choose from, so you should do your research and see which one you like.

In my opinion, you should be choosing your broker based on low fees rather than fancy features.  I personally don’t advocate so called “day trading” activity, which requires very accurate and responsive reporting and order execution.  For the average investor, the basic ability to buy and sell a given stock in a somewhat timely manner is all that matters.  The benefits of real time stats are mostly illusory, while the cost savings due to low fees and commissions are very real indeed.  Cut costs ruthlessly here.

Once you have chosen your broker, sign up for an account.  You will be given the option of choosing between a regular investment account (taxable) and several different types of retirement accounts (tax advantaged).  You should have both types of accounts, with an emphasis on the retirement account.

There are also things called margin accounts, which allow you to borrow money to trade stocks.  I do not recommend these.  If the mortgage crisis taught us anything, it is that leverage is a dangerous concept when combined with speculation, which the stock market it in the short run.  See my post on past stock market performance to see what I’m talking about here.

Choose the accounts, and sign up.  This will involve filling out some personal information, but doesn’t take very long at all in most cases.

Funding Your Account

Once you have set up your account, it’s time to put some money in there!  If your broker is a little old school, this may involve sending them a check in the mail.  However, most modern investment accounts allow you to fund them via electronic funds transfer from your bank account, which is probably what you will want to do.

You can choose one time or regular contribution plans.  Both have there places.  Regular withdrawal programs are good since they can help force you to save money by making it automatic.  Figure out what works for you, and get some money in your account.  No matter what method you choose, this will probably take a few days before you are ready to make your first trade.

Buying and Selling Stocks

Now comes the fun part.  I’ll assume you’ve already worked out an investment strategy and have chosen some stocks to buy.  If not, please read up on this first!  If you know what you want, it is time to buy.  There are two basic types of buy and sell orders, market and limit orders.  A market order is simply an order to buy or sell a certain number of shares of a stock.  No price is specified.  Because of this, the order is completed, or “filled” at whatever price is required to make it happen.  This means you might be paying too much when buying, or getting too little when selling.

To correct this, a limit order allows you to specify a price for buying or selling.  This means you get the price you want, but unless someone else is willing to buy or sell for your price, your order may not get filled.  Still, though, limit orders can be a good way to save a bit when buying and selling stocks.  Just be reasonable with your prices, and don’t expect miracles.

Once the order has been filled, a commission will be charged to your account, and the stocks you purchased will now be visible in your account.  Gone are the days of paper stock certificates, so your positions will merely exist in your electronic account at the brokerage.

That’s all there is to it!  This might make the whole process sound a bit long, but in reality, it isn’t bad at all.  Just go out there and get an account so your can start investing in the stock market today!