The stock market can be intimidating for any new investor. There are many complexities and confusing terms that can lead to problems (not to mention loss of capital)for anyone trying to acquire stock trading education. So…. what should a person do to protect themselves while learning the basics of the market?
My advice is to read this article, digest the information, and then put it to practical use.
This stock trading education article discusses the process of buying and selling shares, and explains the fundamental issues of how investors gain or lose money in the market. As you’re probably aware, a share of stock is actually a portion of a company. You, me, and the rest of the stock holders are the actual owners of a company. So when the company makes money, theoretically the owners (stock holders) share in the profits. Unfortunately they also (at least indirectly) share in the company’s losses as well.
Here are the basic steps involved in the trading of stocks. This is the crucial element to any stock trading education course: The first step is to open an account with your friendly broker and make an initial deposit. Alternatively, if you feel comfortable, you can open an account at a self-trading site such as Scottrade. Of course you need to remember that self-trading companies offer no advice, and little to no assistance. Any stock trading education that you require will have to be acquired from a different source. For purposes of illustration, we’ll start with a fictitious $1,000.
We’ll use 3M as an example. You indicate your interest to your stockbroker, who looks up 3M (MMM). He punches MMM into his quote request system and asks for the current market price (supplied from the New York Stock Exchange) which is $81.18. He explains to you that at $81.18, your $1,000 will buy 12 shares, with a little left over
You put in a bid with your broker for 10 shares at the current market price. Your broker will charge you something in the neighborhood of $30 (does that seem excessive to you?). Your broker will then enter the order, and then he’ll calculate the exact price you will be charged for those 12 shares. Here’s the math: 12 (the number of shares) times $81.18 (the current price for the shares on the open market) for a total of $974.16, plus $30 (the broker’s commission, don’t forget he has to eat too), for a grand total of $1004.16.
Now the real fun begins, and your stock trading education starts to pay off! Somehow, your broker magically finds someone willing to give up his shares at the current market price of 81.18. Your broker will then debit your account of the necessary funds and send it the seller. Of course your broker also takes his $30 commission out of your account as well. It’s as simple as that! You’ve executed your first trade, with a minimal of stock trading education under your belt.
The next day, 3M shares go up to $82.18. Cool…you just made 12 bucks! Of course this is a paper gain at this stage. You don’t actually have the dough in your pocket, and you don’t have to pay taxes on it yet.
One week later you decide to sell your stake in 3M after noticing another increase in stock price. You put in a sell order at market ($83.18).
Once again your broker performs a miracle. He finds a buyer for your stock at the current price, and completes the sale to them. The transaction netted $998.16 for your stock, but you don’t receive that much. In actuality, your broker gets to take another $30 out of your account. As it turns out, you will end up with $968.16 in your account a few days later.
OK, now it’s time to add up the score. Your stock appreciated in value while you held it, so you should be showing a decent profit for efforts. Unfortunately, the profits are nonexistent. Your initial investment of $1,004.16 turned into a balance of $968.16. Clearly you need additional stock trading education!
Fast forward to April 15 of the following year. There may be some good news coming out of this recent loss. There is a short-term capital loss of $36 as a result of your initial adventure in the world of stock market investing. You can probably deduct the loss from your gross income, depending upon your current situation. It’s advisable to seek advice from a tax professional on this subject.
Hopefully this article clears up any confusion on the basics of stock trades and the value of stock trading education.
Conclusion: You should consider trading larger quantities of shares per transaction.
As a comparison, lets see what would have happened had you bought a larger quantity of shares. Assume you acquired 50 shares of 3M at the the same price of $81.18 and sold them at $83.18. Instead of losing money on the transaction, you will realize a gain of $70. Obviously this shows that commissions are a big burden to the small investor. However, if buying large amount of shares just doesn’t fit in your budget, then perhaps you should consider alternatives. Either no-load mutual funds or direct investment plans (DRIPs) would be good alternatives. However, that is a discussion for another day..