How to Trade Stocks – the Buy Process
A brief outline of the sequence of steps involved
As usual for all articles in this series of How to Trade Stocks, we will assume all transactions are being made online with an online brokerage house in which the trader has an active account already established.
Once the market is open for the trading day, the millions of stock transactions that take place between sellers and buyers will establish the prices of individual stocks. The prices will fluctuate throughout the trading day, ranging between a high and a low, in response to the patterns of supply and demand, the same as in any trading process.
There will also be a bid price and an asking price, usually with a difference in those two prices, referred to as the spread.
Perhaps some of these explanations of such simple details are almost a matter of common sense but in learning how to trade stocks it is necessary to understand even the minor aspects and formalities that govern the many activities that take place.
Using the internet or other media sources, up to the minute information is readily available on stocks and stock prices, their trading volumes and their movement in relation to each and every previous trade.
From this, the stock trader can be aware of how the markets and selected stocks are performing at a given time and having made a decision to take a position, either as a buyer or a seller can then place an order with a broker to make the transaction.
To make a trade is an easy and speedy process and whether buying or selling, the routine differs only slightly, but for simplicity let us just consider buying a stock.
The routine of buying a stock that is being traded in the marketplace is a simple transaction based on the buyer placing a bid through a stockbroker to buy a particular stock at a given price. As mentioned, the price of the stock at any moment is already established by the trading activity that is then taking place in the stock and is often fluctuating slightly from transaction to transaction.
Execution price depends on the type of buy order conditions placed by the buyer
The price at which the transaction to buy is executed depends on the form of buying instruction given by the would-be stock purchaser.
The buying price can be set in two ways, either a market order or a limit order. An order to buy expires at either the end of the day or is good until cancelled, according to whatever the buyer signifies as their choice when placing the order.
Market order
In the case of a market order, the stock price of the stock purchase is the price at which the stock is trading at the moment the transaction is completed, which is almost immediately once a purchaser has placed an “At the market” buy order.
The limit order
Provides a way for the buyer to set a specific buy price at which the offer to purchase is made and therefore guarantees the buyer of having the order filled at that price or a lower price. If the limit order bid is lower than the asking price, and if the stock does not reach that specified bid price the order will not be filled.
On a practical basis, unless there is a wide spread between the bid price and the asking price, to avoid the possible of not getting an order filled on a stock that the trader wants, the limit order will be priced at the current asking price, allowing the transaction to be completed but not being at the mercy of committing to an unexpected inflated price caused by some momentary spike in the price that can happen on occasion.
Immediately set the sell price by using “stops”, always have an exit strategy
When the stock purchase is completed, the trader also will have a target sell price in mind, a higher price at which to make an exit for all or part of the holding, there is also a way to set a lower sell price at which the stock is to be sold if the price falls from the initial purchase price or falls back after having made a gain. This is done by setting a stop order, of which there are several types.
Setting a stop order is not mandatory but the wise trader will invoke the process. Always have an exit strategy
Stops will be the subject of our next post in this series of How to Trade Stocks, to see that go to next post:
Selling a Stock – Exit Price Consderations
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