Different Ways To Buy Stock
Investing in stocks is a great way to build wealth by harnessing the power of growing companies. Getting started can feel daunting for many beginners looking to get into the stock market despite the potential long-term gains, but you can start buying stock in minutes.
different ways to buy stock
A market order is an order to buy or sell a stock at the market's current best available price. A market order typically ensures an execution, but it doesn't guarantee a specified price. Market orders are optimal when the primary goal is to execute the trade immediately. A market order is generally appropriate when you think a stock is priced right, when you are sure you want a fill on your order, or when you want an immediate execution.
A few caveats: A stock's quote typically includes the highest bid potential buyers are willing to pay to acquire the stock, lowest offer potential sellers are willing to accept to sell the stock, and the last price at which the stock traded. However, the last trade price may not necessarily be current, particularly in the case of less-liquid stocks, whose last trade may have occurred minutes or hours ago. This might also be the case in fast-moving markets, when stock prices can change significantly in a short period of time. Therefore, when placing a market order, the current bid and offer prices are generally of greater importance than the last trade price.
Generally, market orders should be placed when the market is already open. A market order placed when markets are closed would be executed at the next market open, which could be significantly higher or lower from its prior close. Between market sessions, numerous factors can impact a stock's price, such as the release of earnings, company news or economic data, or unexpected events that affect an entire industry, sector, or the market as a whole.
Note, even if the stock reached the specified limit price, your order may not be filled, because there may be orders ahead of yours. In that case, there may not be enough (or additional) sellers willing to sell at that limit price, so your order wouldn't be filled. (Limit orders are generally executed on a first come, first served basis.) That said, it's also possible your order could fill at an even better price. For example, a buy order could execute below your limit price, and a sell order could execute for more than your limit price.
A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price"). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order isn't executed.
When you want to buy a stock should it break above a certain level, because you think that could signal the start of a continued riseA sell stop order is sometimes referred to as a "stop-loss" order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price. If the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market's current price. This sell stop order is not guaranteed to execute near your stop price.
While the two graphs may look similar, note that the position of the red and green arrows is reversed: the stop order to sell would trigger when the stock price hit $133 (or below), and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it's possible that the order could be executed at a price that's lower than the stop price. Conversely, for the stop order to buy, if the stock price of $142 is reached, the buy stop order could be executed at a higher price.
A price gap occurs when a stock's price makes a sharp move up or down with no trading occurring in between. It can be due to factors like earnings announcements, a change in an analyst's outlook or a news release. Gaps frequently occur at the open of major exchanges, when news or events outside of trading hours have created an imbalance in supply and demand.
Remember that the key difference between a limit order and a stop order is that the limit order will only be filled at the specified limit price or better; whereas, once a stop order triggers at the specified price, it will be filled at the prevailing price in the market--which means that it could be executed at a price significantly different than the stop price.
The next chart shows a stock that "gapped down" from $29 to $25.20 between its previous close and its next opening. A stop order to sell at a stop price of $29--which would trigger at the market's open because the stock's price fell below the stop price and, as a market order, execute at $25.20--could be significantly lower than intended, and worse for the seller.
In a similar way that a "gap down" can work against you with a stop order to sell, a "gap up" can work in your favor in the case of a limit order to sell, as illustrated in the chart below. In this example, a limit order to sell is placed at a limit price of $50. The stock's prior closing price was $47. If the stock opened at $63.00 due to positive news released after the prior market's close, the trade would be executed at the market's open at that price--higher than anticipated, and better for the seller.
Many factors can affect trade executions. In addition to using different order types, traders can specify other conditions that affect an order's time in effect, volume or price constraints. Before placing your trade, become familiar with the various ways you can control your order; that way, you will be much more likely to receive the outcome you are seeking.
Learning how to invest begins with learning how to invest in stocks. Historically, the return on equity investments has outpaced many other assets, making them a powerful tool for those looking to grow their wealth. Our guide will help you understand how to kick-start your investing journey by learning how to buy stocks.
There are a variety of different account types that let you buy stocks. The options outlined above offer some or all of these different investment accounts, although some retirement accounts are only available via your employer.
If you plan on buying stocks via a retirement account like an IRA, you might want to establish a monthly recurring deposit. For example, the 2020 contribution limit for an IRA is $6,000 for anyone below age 50, and $7,000 for anyone 50 or older. If your goal is to max out your contribution for the year, you might set a recurring deposit of $500 per month to meet that max limit.
For all other types of investment accounts, establish clear investing goals and then decide how much of your monthly budget you want to invest in stocks. You can choose to move funds into your account manually or set up recurring deposits to keep your stock investment goals on track.
As you make your initial stock purchases, consider enrolling in a dividend reinvestment plan (DRIP). Reinvestment plans take the dividends you earn from individual stocks, mutual funds or ETFs, and automatically buys more shares of the funds or stocks you own. You may end up owning fractional shares, but that will keep more of your money working and less sitting in cash.
Rebalancing helps ensure your portfolio stays balanced with a mix of stocks that are appropriate for your risk tolerance and financial goals. Market swings can unbalance your asset mix, so regular check-ins can help you make incremental trades to keep your portfolio in order.
1. Dividends. When companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called "income stocks."
2. Capital gains. Stocks are bought and sold constantly throughout each trading day, and their prices change all the time. When the price of a stock increases enough to recoup any trading fees, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you'll incur a capital loss.
The performance of an individual stock is also affected by what's happening in the stock market in general, which is in turn affected by the economy as a whole. For example, if interest rates go up, some investors might sell off stock and use that money to buy bonds. If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors influence market performance, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits.
Some companies also issue preferred stock, which usually guarantees a fixed dividend payment similar to the coupon on a bond. This might make preferred stocks attractive to people looking for income. Dividends on preferred stock are paid out before dividends on common stock.
The price of preferred stock, however, doesn't move as much as common stock prices. This means that while preferred stock doesn't lose much value even during a downturn in the stock market, it doesn't increase much either, even if the price of the common stock soars.
An important additional difference between common stock and preferred stock has to do with what happens if the company fails. In that event, there is a priority list for a company's financial obligations and obligations to preferred stockholders must be met before those to common stockholders. On the other hand, preferred stockholders are lower on the list than bondholders.
A company might offer a separate class of stock for one of its divisions that was a well-known company before an acquisition. Or a company might issue different share classes that trade at different prices, have different voting rights or different dividend policies. 041b061a72