I started my brokerage account, and now I am trying to figure out what to do with my first $500 in the market. (I have already been investing in company stock and a fund in my 401k. For more see my intro to investing.)
I entered my first trade Friday morning, and it was exciting, though it has not executed yet. I have been following a few stocks recently, and I picked a bottom for one of them. I decided to enter a limit trade on the stock.
If you don’t know what a limit trade is, this is a good time to keep reading. If you do know what a limit trade is, you should keep reading anyway.
There are several types of trades you can make at your brokerage. The most common are market, limit, and stop.
A market trade is a purchase at the current market price. Your stock broker will purchase the desired number of shares as quickly as possible. If the price is on the way up or down, you get it at whatever they can get it for. Usually large firms can guarantee the current price for you at the time you enter your trade.
A limit order, what I did this morning, sets a limit on the purchase price. For example, if you are watching a stock trade around $7.50 but you would not pay more than $7 for it, you can enter a $7 limit. When the stock hits $7 per share, the trade will execute. From there, the stock can go up or down in value, but you bought it for $7 or less. If it never gets down to $7, you don’t buy it. My limit order has not executed yet, and may never execute. I think, though, that the stock is worth more than the limit I entered and it can only go up from there. I am protecting a loss.
A stop trade order is a protection barrier from a drop. If you own a stock that is trading at $20 per share, you can set a stop anywhere below that $20. If you enter a stop at $17, the stock will automatically sell if it hits $17 or below. A stop prevents losses below a certain point. If the stock rises in value you can cancel the stop and set a new one at a higher price.
Knowing how to use these tools is vital to making money, and not losing money, on the stock market. While we never know what a stock is going to do, we can set our trades to protect ourselves. If you use a limit order to buy a stock at $2 and watch it rise to $10, you can set a stop at $8 and sleep easy knowing you made at least $8 per share. In that scenario, or any other, make sure to trade smart and diversify your portfolio.
In the long run, the market always goes back up. Stocks are down, it might be a good time to start buying so you can sell high later.