Let’s face it, most people don’t know how to start a business or even have the time to try. However, they all have the opportunity to invest in the best companies in the world through the stock market. This is done by buying and selling stocks on publicly traded companies.
For example, Apple and Amazon are two of the largest companies in the world, both of them are traded on the NASDAQ stock exchange. The second largest US stock exchange behind the New York Stock Exchange.
A company will issue shares of stock to raise funds for business. The issued shares represent the amount of capital invested by the shareholders of the company.
Apple has over 5B shares outstanding. If its stock is trading at $185 per share, than it has a market cap (shares x stock price) of about $930B. There are thousands of publicly traded stocks investors and traders can select from.
When you buy a stock you are hoping to sell it for a higher price sometime in the future. Someone might buy a stock and intend to hold it for years, this type of stock buyer is considered an investor. On the other hand, someone else might buy a stock and hold it for just a few minutes, in hopes of making a short-term profit.
If a stock is held for less than one year, and sold for a profit, the capital gain will be taxed at ordinary income tax rates. However, if it’s held for more than one year and later sold for a profit, the capital gain is taxed at a maximum rate of 20%
Buying and Selling Stocks- Getting Started
In order to be able to trade stocks in the US, you must have a stock brokerage account. Opening up a stock brokerage account is fairly simple, all you need to do is fill out some personal and financial information. They want to make sure that you are who you say you are, not going to launder money, and are financially capable to risk money in the stock market.
That said, you can open a stock brokerage account online. Some of the largest online brokers today are: Fidelity, Charles Schwab, TD Ameritrade, and E-Trade.
Selecting the right broker depends on several factors, some include: minimum account size accepted, commissions, ease of the trading platform, types of margin accounts.
You should conduct your own due diligence before selecting a broker. Many of them offer demo accounts for you to try out their platform, a great way for you to find out which platform works best for your needs.
There are two types of brokerage accounts: cash and margin. A cash account is one where the investor must pay the full amount for stocks bought.
On the other hand, a margin account allows the investor to borrow money from their broker to buy stocks. Stocks in your existing portfolio act as collateral. There is no such thing as a free lunch, investors can incur interest costs when stocks are bought on margin.
You can also buy and sell stocks through an individual retirement account (IRA). This type of account allows investors to save for retirement with tax-free growth or on a tax-deferred basis. The three most common IRAs are: Traditional, Roth, and Roller IRA.
Buying and Selling Stocks- Trading Basics
When you’re buying and selling stocks you are looking at three prices: the current, bid, and offer price.
In the example above, Microsoft is last trading at $29.71, the current price. However, traders in the market are bidding $29.70. While other traders are offering to sell shares at $29.71.
Only when the buyer and seller agree on a price is the trade executed. The minimum amount shares you can buy is one. Your broker will charge you a commission for the transaction.
That said, there are several different ways you can buy and sell stocks. Here are some of the more common:
Marker Order: This order executes at the current offer price if you are buying and the current bid price if you are selling.
Limit Order: This order is executed at a specific price that you set. For example, if XYZ stock is trading at $100 and you want to buy it at $99, you can put out a limit to buy at $99, your order should get executed if the stock trades down to $99.
Stop Limit: A buy or sell limit order that executes when a specific price is reached.
Buying and Selling Stocks- Short Selling
Now, when you sell a stock you don’t own, you are short selling. A short seller borrows shares of stock that they don’t own from their broker. Their goal is to profit from a decline in the stock they are short.
You’ll need a margin account in order to sell stocks short.
For example, if a trader sells 1,000 shares short of a stock at $20, $20,000 goes into their trading account. However, it’s not free money, in fact, short selling is riskier than buying stocks. When you buy a stock your risk is defined to your total investment. On the other hand, when you short sell a stock, your risk is undefined.
Let’s assume the trader had $30,000 in their account and the stock they were short suddenly halted for news pending. The company announces that it is going to be acquired for $60. When it re-opens it is trading at $55, the trader is short $55,000 in stock and now has lost their entire account and then some.
That said, short selling can be very lucrative. Imagine shorting Enron near its peak or the dot com stocks before the bubble popped. A buyer and seller is what creates a market. Short sellers are neither good nor bad, but play a vital role in the stock market ecosystem.
Buying and Selling Stocks- What Investors Look At
Investors and traders look at different things when it comes to buying and selling stocks. A short-term trader is primarily interested in stocks that have catalysts, they need volatility to turn a profit. Some catalysts traders play include: earnings, economic, political, breaking news, analyst research and more.
On the other hand, a long-term investor is not necessarily concerned with the day-to-day fluctuations of their stocks, they are judging the company on a much longer time horizon.
Many investors focus on the fundamentals of a company. They include:
- Return on Assets
- Return on Equity
- Profit Margin
- Gross Margin
- Dividend Distribution
- P/E Ratio
- Fwd P/E Ratio
and much more.
The Bottom Line
Getting started with buying and selling stocks is as easy as opening up a brokerage account online. That said, there are different types of accounts to consider. The type of account you select should be reflective on your objectives. For example, most IRAs do not allow for short selling.
It’s important to take the time to review the different features each broker offers and to request a demo of their trading platform. Trading on demo is a great way to learn about the stock market and how stocks move. You can also practice different order types while practicing.
Before you know it, you’ll be using real money, buying and selling stocks.