How to Buy Shares to Profit Twice

Buying shares — especially that first time you become a bona fide part owner of a business — deserves its own celebratory ritual. But before we pick out shareholder party hats and rent a ticker tape confetti cannon, let’s review the specific steps for how to buy shares online.

Summary:

  • Open an online brokerage account
  • Select the stocks you want to buy
  • Decide how many shares to buy
  • Choose your order type to buy shares
  • Decide when and how to sell shares
     

Step 1: Open an online brokerage account

Wondering where to buy shares? Movies love to show frenzied traders shouting orders on the floor of the New York Stock Exchange, but these days very few stock trades happen this way. Today, the easiest option is to buy shares online through an online stockbroker.

Opening an online brokerage account is as easy as setting up a bank account: You complete an account application, provide proof of identification and choose how you want to fund the account. You may fund your account by mailing a check or transferring funds electronically. 

How do you find a broker that’s worthy of your dough? Two things to consider when opening an account to buy shares:

1. The cost of commissions: The commission is the fee a broker charges each time you buy and sell shares online. Finding a broker that charges low commissions will be most important to active traders — generally, those who place 10 or more trades per month. Commissions can add up quickly if you’re trading regularly. 

2. How much support you want. Consider the broker’s offerings of educational tools, investment guidance, shares-trading research and access to real, live humans via phone, email, online chat or branch offices. This is especially important for beginner investors, as you will want knowledgable customer service representatives available to answer your questions.
 

Continue reading or play around with a stock market simulator and learn how to buy shares online in real-time, with virtual funds.

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Step 2: Select the stocks you want to buy

Once you’ve set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experiences as a consumer.

Don’t let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You’re looking for companies of which you want to become a part-owner.

Warren Buffett famously said, “Buy shares into a company because you want to own it, not because you want to go up.” He’s done pretty well for himself by following that rule.

How to buy shares - The 1st criteria

Start with identifying the currencies you want to represent in your portfolio, then you allocate a percentage of your portfolio to each one, and finally, you research the individual shares that provide that given percentage exposure. That’s the initial idea, as a good investment denominated into a wrong currency may become a bad investment and vice-versa.

a) Identify the right currencies 

  • Study currency market weekly or monthly charts or representative currency indexes for your projected holding period. If you’re planning to buy and hold stocks for months to years, you want to see trends over the prior few years. For support, read also what is forex and how does it work.
  • Identify the currencies with the healthiest uptrends over that period. For support, read how to invest in forex for income.
  • Check that the underlying national economic fundamentals support that trend with relatively good growth, or at least consistently low ratios of debt to the gross domestic product (GDP) and culture of fiscal discipline, not growing budget and trade deficits. For support, read also how to use the forexfactory.com calendar and how to read the news.

b) Allocate a percentage of your portfolio to each currency 

  • Allocate percentages of your portfolio for income-generating instruments denominated in or tied to those currencies that are more likely to appreciate in the long run.  

c) Choose the individual shares that provide that given percentage exposure

  • Then shop around for specific assets you want that are denominated in or exposed to those currencies so that you have a set portion of your portfolio in both the right currencies and assets in those currencies. The research method is the same as for any shares and mutual funds buying, forex, cryptocurrency and commodities, and so on. The only difference is that in addition to your normal screening criteria, you screen by country or currency, either traditional shares listed on a stock exchange or indices and shares CFD (IF you prefer CFD trading, a more flexible alternative to traditional share dealing, but also riskier) that meet your investment criteria.

>> See also a CASE STUDY for Indonesian stocks - To Buy or Not to Buy

How to buy shares - The 2nd criteria

Here is a quick summary of what to look for in an investment stock, keeping in mind the points discussed above. 

  • Dividend yield over 5%, but the payout ratio below 100%.
  • Average volume over 300,000 shares.
  • Priced over $2; no penny stocks.
  • IPO date more than a year ago; preference is given to stocks which have been publicly traded for 10 years or more.
  • P/E greater than zero (shows the company is profitable). Consider looking for stocks with a low P/E, for example, greater than zero but less than five. Also, consider looking at stocks where the Forward P/E is lower than the current P/E. This shows earnings are expected to increase, and if they do the stock is a better buy at the current price. 
  • Operating Margin Over 10%. 

How to buy shares - The 3rd criteria

View charts of the shares produced by the screener above. The next criteria for buying shares is:

  • Only buy shares at the major long-term support area. We want to buy shares at relatively cheap prices (compared to historical values), not expensive prices. Investment trades don't require a stop loss, but you should have a price in mind where you get out if conditions don't improve for the stock. An investment doesn't mean you hold it forever if it doesn't do what you expect. Have a low tolerance for shares that keep dropping.

Also, have an exit plan for how you will exit a profitable trade. Define how and why you will exit. Since we used support to get into the trade, you may consider exiting just below a long-term resistance level. Once you are out of your trade, don't worry about what the shares does after. Take the money and buy other shares, going through the same process again, as discussed above.

This brings us to one final guideline for buying shares:

  • If buying shares at support, and planning to exit just below resistance, the upside potential should outweigh the downside risk (to $0) by at least 2:1. That means that if you buy shares at $5, you should be reasonable able to get out of the stock at $15 or higher. In an absolute worst case you lose $5 a share (but since we don't hold losers forever, this is highly unlikely), but based on the historical chart it is quite feasible to make $10/share or more. This is known as the risk/reward ratio.
     

Step 3: Decide how many shares to buy

You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with stock all at once. Consider starting small — really small — by purchasing just a single share to get a feel for what it’s like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can add to your position over time as you master the shareholder swagger.

Take into consideration to buy shares in Margin: Borrowing for a Chance at Bigger Returns

margin account amplifies an investor’s buying power by allowing her to borrow money to buy shares. Through leverage, an investor can attain higher gains. Without it, an investor’s spending is limited to the amount of money deposited. On the flip side, margin trading exposes traders to losses. 

Leverage is actually a very efficient use of trading capital and is valued by professional traders precisely because it allows them to trade larger positions (i.e. more contracts, or shares, etc.) with less trading capital. Leverage does not alter the potential profit or loss that a trade can make. Rather, it reduces the amount of trading capital that must be used, thereby releasing trading capital for other trades. For example, a trader that wanted to buy a thousand shares of stock at $20 per share would only require perhaps $5,000 of trading capital, thereby leaving the remaining $15,000 available for additional trades.

In addition to being an efficient use of trading capital, leverage can also significantly reduce the risk for certain types of trades. For example, a trader that wanted to invest in ten thousand shares of an individual stock at $10 per share would require $100,000 worth of cash, and all $100,000 would be at risk. However, a trader that wanted to purchase shares in exactly the same stock with exactly the same potential profit or loss (i.e. a tick value of $100 per 0.01 change in price) using the warrants markets (highly leveraged markets), would only need a fraction of the $100,000 worth of cash (perhaps $5,000), and only the $5,000 would be at risk.

>> Play around in a demo account and notice how buying stocks on margin can amplify the profits.

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Step 4: Choose your order type to buy shares

Terms like "market order" and "limit order" may sound complicated but in reality, they are simple concepts that you can understand with just a little bit of work after you learn how to buy shares (previous steps). Most investors won't encounter more than a few of these type of trades, but it's smart to think of them as potential tools in your stock trading arsenal. 

Market Order

The simplest and most common way to buy shares online is a market order. Market orders simply tell your broker that you are willing to take whatever price is presented to you when your order is executed. These orders are often subject to the lowest commission since they are the easiest to execute.

Imagine you want to buy 100 shares of Apple. The current market price is $181. You log into your brokerage account or call your broker directly on the phone and tell him, “Place a market order for 100 shares of Apple Computer, ticker symbol AAPL." By the time the order is executed a few seconds later, the market price may be higher or lower; $181.50 or $180.60, for example. Your total cost before commissions will vary accordingly.

Limit Order

limit order allows you to limit either the maximum price you pay or the minimum price you are willing to accept when buying or selling a stock. The primary difference between a market order and a limit order is that your stock broker cannot guarantee that the latter will be executed.

Imagine you want to buy 300 shares of U.S. Bank stock. The current price is $55 per share. You do not want to pay more than $52, so you place a limit order set to execute at $52 or less. If the stock falls to that price, your order should be executed.

There are three considerations you should take into account before placing a limit order:

  • The stock price may never fall (or rise) to the limit you’ve established. As a result, your order may never be executed.
  • Limit orders are executed by your broker in the order they are received. It is possible that the stock you are interested in buying (selling) will reach your limit price yet your trade will not be filled because of the price fluctuated above (below) your limit before the broker could get to your order. It is less common in the age of electronic trading.
  • If there is a sudden drop in the stock price, your order will be executed at your limit price. In other words, imagine the stock you want is trading at $50 per share. You have a limit order placed at $48 per share. The CEO resigns, and in a single session, the stock plummets to $40 per share. As the security was falling in price, your order was executed. You are now sitting on a loss of $8 per share.
  • To protect yourself from sudden market shifts, many professionals recommend that all stock trades, whether you are buying or selling shares, be placed as limit orders. 

Stop Orders

In common parlance, stop and stop-limit orders are known as “stop-loss” orders because speculators use them to lock in profits from profitable trades. Most investors don't concern themselves with these kinds of orders, but its worth understanding how they work.

A stop order automatically converts into a market order when a predetermined price is reached (this is referred to as the “stop price”). At that point, the ordinary rules of market orders apply; the order is guaranteed to be executed, you simply don’t know the price – it may be higher or lower than the current price reported on the ticker symbol.

Contrast that to a stop-limit order, which automatically converts into a limit order (not a market order) when the stop price is reached. As discussed earlier in this tutorial, your order may or may not be executed depending upon the price movement of the security.

Trailing Stop

One way to protect gains and limit losses automatically is by placing a trailing stop order. With a trailing stop order, you set a stop price as either a spread in points or a percentage of current market value.

Imagine you purchased 500 shares of Hershey at $50 per share.  The current price is $57. You want to lock in at least $5 of the per-share profit you’ve made but wish to continue holding the stock, hoping to benefit from any further increases. To meet your objective, you could place a trailing stop order with a stop value of $2 per share.

In practical terms, here is what happens: Your order will sit on your broker’s books and automatically adjust upwards as the price of Hershey’s common stock increases. At the time your trailing stop order was placed, your broker knows to sell HSY if the price falls below $55 ($57 current market price - $2 trailing stop loss = $55 sale price).

Imagine Hershey increases steadily to $62 per share.  Now, your trailing stop order has automatically kept pace and will convert to a market order at a $60 sale price ($62 current stock price - $2 trailing stop value = $60 per share sale price). It should provide a capital gain of $10 per share.


Step 5: Choose when and how to sell shares 

Much is made about buying shares; investors tend to put far less thought into how to sell shares.

That’s a mistake, as the sale is when the money is made. Getting it right can be key to claiming your profits — or, in some cases, cutting your losses.

Three steps to selling shares:

Check your emotions

There are good reasons to sell shares and bad reasons.

Ongoing poor performance relative to the competition, irresponsible leadership and management decisions you don’t support may all make the list of good reasons. Maybe you’ve decided your money would do better elsewhere, or you’re harvesting losses to offset gains for which you’ll owe income taxes.

Bad reasons typically involve a knee-jerk reaction to short-term market fluctuations or one-off company news. Bailing when things get rocky-only locks in your losses, which is the opposite of what you want. (You know the saying: Buy low, sell high.) Before you sell a stock, go over your reasoning to ensure you’re not giving in to an emotional response you might later regret.

» Prone to emotional investing? You might be a good candidate for a Robo-advisor.

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Decide on an order type

If you’re familiar with buying stock, you’re familiar with selling it — the options for order types are the same. The goal, however, is different: You use order types to limit costs on the purchase of stock. On the sale, your main objective is to limit losses and maximize returns

Let’s go through some examples. Say you have a stock with a current market price of $40.

MARKET ORDER
The order will execute within a few seconds at market price. You may sell for $40, slightly more or slightly less — stock prices can fluctuate in the time it takes to place and execute the order.

The risk: Your stock could sell at any price, with no restrictions.

LIMIT ORDER
You set a limit price and the order will execute only if the stock is trading at or above that price. If your limit order is for $41, your order will execute only if the stock trades at or above $41.

The risk: You could end up not selling if the stock never rises to your limit price.

STOP-LOSS ORDER
You set a stop price and your order will execute only if your stock begins trading at or below that price. If your stop price is $38, your order will execute as a market order if the stock price falls to $38 or less.

The risk: You could sell for less than your stop price — there is no floor. Also, a temporary drop in price may trigger a sale when you don’t want it to.

STOP-LIMIT ORDER
You set both a stop price and a limit price. If your stop price is $39 and your limit price is $37, your order will execute as a limit order at or above $37 if the stock’s bid price drops to $39.

The risk: You’ve added a floor, but if the stock drops below it too quickly — which can happen in a volatile market — you may not sell at all.
 

Final words about buying and selling stocks online

We hope your first stock purchase marks the beginning of a lifelong journey of successful investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them.

What you can do is:

  • Make sure you have the right tools for the job. AM Broker can help you identify the right brokerage account for you.
  • Be mindful of brokerage fees. These can significantly erode your returns.
  • Consider also investing in ETFs, which allow you to buy many stocks in one transaction. 

Understanding how to buy shares online is important, but if you need some help MetaTrader 5 AM Broker provides access to the largest Stock Markets in the world, as well as currency market to identify those shares in a strong uptrend. 

Open a stock trading account and buy shares with the lowest commission: 1$ per trade.

>> Let's get you started!

 

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Categories:  Investing