Learn The Stock Market And How to Trade

I’m going to assume this is the first time you’ve ever bought a stock, or your stock buying has just been random or sporadic.  There are a series of mini tasks you need to work through when buying stock.  None of them individually are difficult, but if you are new and look at them in whole they look pretty overwhelming.  This causes most people to simply skip the steps and get mediocre results.  Sure you can get lucky, but just go to Vegas then; it will be a whole lot more fun.  This isn’t going to be a generic how to buy and sell stock, but very specific how to buy stock.

Prescreen Your Stocks

This conversation differs from stock sector to stock sector, but you should predetermine which stock you want before hand.  The decision making is different if your question is how to buy gold stock versus how to buy oil stock, but this is where you should begin.  If you’re stock trading then your prescreened stocks also needs to meet your timing criteria.  What triggers is telling you now is when to buy stock.  If you’re just buying the whole market on a routine basis (dollar cost averaging) then you can skip this step.

Determine How Much Stock

This area comes down to good money management.  Personally I never let a single purchase consume more than 1% of the buy in commissions.  Your taste for slippage may differ.  So if I’m going to buy stock xyz and it costs $10 to buy I will make sure I at least have $1000 to invest on this purchase. 

My other criterion has to do with diversification.  I don’t like to lose more than 2% of my whole portfolio in any one trade.  So I compare this purchase to my entire portfolio, likely loss potential, and shrink my purchase size if necessary.

Where to Buy Stock

Where you choose to purchase stock has to do with many factors.  My first question is which portfolio this is going into.  I personally do my medium risk investing in my retirement plans because if they do get larger gains over time (if not I’m doing something wrong) then I want the tax savings there.  I do my long term blue chip investing in my normal accounts because if I hold over year, the tax rate is currently very low anyways.  Sometimes you know someone personally who is selling off their stock in bulk and you may want to do an over the counter trade.  So this is situation dependent. 

After you determine this then you want to decide the broker you want to go through.  I don’t personally use their information services, so this is of little concern to me on longer term trades so I mostly look for good execution and low commissions.  If you’re a day trader then you’ll want to factor in accurate quoting systems.  If you don’t like computers or are prone to making silly mistakes consider paying the extra for a live stock broker.  There are much more forgiving.  Those who buy stock online can almost always tell you of that one fatal error.

Use Short Term Technical Analysis

Even if you are a fundamental stock investor to the core I believe that you should use short term technical analysis before you purchase your stock.  Even just using simple moving averages to pick the next resistance point up or down you’ll be ahead of just blindly putting in market prices.  Set your buy point just above the nearest resistance point.  If you’re concerned about a big rally set two buy points, one at the support below the current stock price, one just above the resistance above the current stock price.  Earning 1 or 2 % extra at your initial buy does a lot to help over all returns.  This is also the time to set your stop losses.  Do it.  It’s not worth the risk of not having them; you can always buy back into a stock. 

Now just place your stock order and move on to the next purchase!  That’s how to buy stock.

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