Saturday, October 30, 2010
Investing 101: The Basics pt 2 (Buying/Selling)
Ok so as I explained in part 1 - exactly what a stock is, what a holding a position entails: both long and short, and gave an overview of what a catalyst is, however in part II I am going to make an attempt to take a little deeper dive into buying and selling and just the overall fundamentals of how stocks are traded themselves.
Buying stocks: Typically when you buy any stock or publicly traded assets you have a couple of options worth mentioning which include Market orders and Limit orders. Market orders are an order to buy or sell a stock immediately at the best available current price or essentially buying it at its next best price. Typically when someone places a market order its because they are attempting to get into a stock quickly before it rises and they've identified a range in which they are willing to purchase the stock at, that being said because the caveat of placing market orders is that you are essentially agreeing to purchase a stock at its next best available price so if the stock shoots up to an additional $1.00 - $2.00 than you'll be paying 1-2 dollars more than what you expected for a stock. As I recommendation I would never buy stocks on the opening of the market or on the heels of a company announcement using market orders simply because you are unable to predict either what the opening value of the trade will be or the adverse impact the announcement will have. From a managment perspective using market orders to buy into a stock are a forbidden fruit so use w/
caution. Whereas on the otherhand, Limit orders are a money managers dream come true. Limit orders are orders placed with a brokerage to buy a set number of shares at a specified price or better, furthermore limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled. So from a money management perspective it allows you to somewhat control the terms and conditions of a trade, it gives you control. Therefore you could say for example: buy $500 shares of X stock @ $8 (limit order) which would essentially mean buy $500 worth of a specific stock up until in reaches $8 or if the stock is already over $8 then, buy $500 worth of stock once the prices drops below $8. Inevitably using limit orders allows you to to be able to control, predict, budget, and forecast what all of your costs will be.
Selling stocks: Just as with buying stocks, when selling them also there are a few variances to discuss but for the purposes of this tutorial I will only be covering Stop-Loss order for simplicity and good practice. As you can probably already tell from the name a Stop-Loss order is an order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position. So an example of this would be lets say you purchased a stock for $5 originally, since then it has now gone up to $20, but so you will not lose all that you've earned in the event that it goes back down you enter in a stop loss sell order of $18 which would essentially execute the sequence of events to say "now that the stocks has risen to $20 if it all drops back down below $18 then sell it at $18" so now instead of the possibility of it dropping back down to $6 you have now been able to make a $13 profit per share (bought @ $5 sold @ $18 = $13 profit). Make sense? In addition if you want to think strategically, setting a stop-loss order for 10% for example below the price you paid for the stock will limit your loss to 10%. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making.
But still even with all being said please do your own research... Part III Performance Metrix (Coming Soon)
Oh and just so you know I ain't bullshitting w/ ya'll to cut and paste an screenshot of my whole portfolio probably wouldn't be the smartest thing to do but I could manage to show a screen shot of one of my better positions: LVG (Las Vegas Sans) so think i'm think playing if you want to: