Are you thinking about buying stocks? You should, exclaims Markus Heitkoetter of Rockwell Trading.
The stock market is making new all-time highs, and there are tremendous opportunities in the market. Time to buy some stocks!
But there are a lot of things to consider.
- What stock should you buy?
- How do you place an order?
- What is the difference between market orders, stop orders, and limit orders?
- Do you use day orders or GTC orders?
If you are new to trading, it can be hard to remember all these details. And that’s why we created this complete tutorial for beginners that explains everything you need to know about buying stocks online in five easy steps. Let’s get started:
1. Select an Online Stockbroker
If you want to buy a stock, you MUST have an account with an online broker. If you already have a broker, you can skip ahead to the next step. There will be timestamps in the description of the video. But if you need a broker or you don’t know whether your broker is any good, let’s talk about it for a moment. The good news: It will only take you 15 min to open an account, and it will be ready to trade within a day.
There are plenty of online brokers to choose from.
The most popular online stockbrokers in the US include:
- TD Ameritrade
- Interactive Brokers
- Charles Schwab
- … and many others
So how do you choose the right broker? Here are few things to consider:
Trading costs – Think about how much you plan to trade and compare trading costs. Some brokers charge $5+ per trade, while most others offer commission-free trading. If you only place a few trades per year, this won’t matter. But if you are planning to actively buy and sell stocks, you need to pay attention to these trading costs. But commissions are only ONE of the criteria you should consider. For me, it’s also important that it is easy to use their platform. After all, you don’t want to fumble around when placing a trade!
I want to have some great customer support. When I have a problem, I want to be able to call somebody and TALK to them. I do not want to write an email to support and wait for a day to receive an answer. I don’t want to be in a long waiting line, just to hear 156 times: “Your call is important to us. Please stay on the line until the next customer support specialist is available”
But let’s move on to step two:
2. Research the Stocks You Want to Buy
In a moment, I’ll show you how I pick the best stocks to trade. If you already know what stock you want to buy, just skip ahead to the next section.
Here’s how I pick the best stocks to buy. I use technical analysis, and I’m using three indicators:
- and MACD
And am using my software to scan 14,000 stocks and ETFs every day to find the ones with the highest probability to trade. So let’s say I want to buy shares of Signet Jeweler (SIG).
Here’s how to do it:
3. Decide How Many Shares to Buy
Most people don’t know how to determine the number of shares to buy.
But this is crucial. If you buy too many or too few shares, your trades might turn out badly and cost you a lot of money.
Let me show you how I do it. It’s a simple two-step approach:
Step 1: Determine the Risk Per Share
First, you need to determine how much you want to risk per share. This is also called “stop-loss”. It’s a stock price level at which you admit that you were wrong and will now sell the stock at a loss. Losses are part of our business as traders, and the key is to keep your losses small. So let me show you how to do it.
There are many ways to determine a stop loss. Here are two popular approaches:
Use Support Levels
You can just look at the chart of the stock you want to buy and determine a support level. In our example, we see that $60 has been a very good support level for this stock. If the stock price moves below $60, you were probably wrong, and it’s time to sell the stock. However, I believe that THIS is too much risk. Here’s what I like to do:
Use the Average Daily Range (ADR)
I like to use the Average Daily Range to determine my stop loss. The Average Daily Range (ADR) tells you how much a stock moves on average during a day. You can easily calculate it by subtracting the low of the day from the high, and then build a simple seven-day moving average.
Here’s the formula:
MovingAvg ( High of Day – Low Of Day, 7)
For our example, we see that the ADR is $3.61. We want to give the stock enough room to move throughout the day, and that’s why I like to use 1.5 * ADR as a stop loss.
In our example, that would be 1.5 * 3.61 = $5.42. So, if we buy the stock at $71.03, our stop loss would be 71.03 – 5.42 = 65.41. That is a great stop-loss level for me.
What does all of this have to do with the amount of shares we want to buy?
Well, that’s why we need to step two.
Step 2: Calculate the Number of Shares
As a rule of thumb, you should not risk more than 2% of your account on any given trade.
Let’s say you have a $10,000 account. 2% of $10,000 is $200. And that’s the maximum loss for this trade. How can you make sure you’re not losing more?
By adjusting the number of shares you buy to the risk:
We take the overall risk ($200) and divide it by the stop loss amount:
$200 / 65.61 = 36 shares.
Since we plan to exit the trade when the stock moves from 71.03 to 65.61, we would lose $5.42 per share, i.e. 36 * 5.42 = 195.12 on the trade. Making sense?
Let’s jump to our trading platform and enter the information that we have thus far:
Amount of Shares: 36
Next, we have to specify at what price we want to buy the stock.
4. Choose your stock order type: Market, Stop, or Limit Order
There are three types of orders that you can use: Market, Stop, or Limit Order. Let me explain each one and the pros and cons:
A market order is an instruction to your broker or trading platform to buy the stock at the current asking price. For example, if you enter a market buy of 36 shares of SIG, then your trade will be executed immediately at the current ask price, in this example 69.50.
The advantage of this order: You get immediately filled and you are now the proud owner of 36 shares of Signet Jeweler. The disadvantage is that you had zero control over this trade price, other than watching the market and waiting for the right moment.
That’s why I prefer to use a stop order.
A stop order is an order to buy or sell a stock once the prevailing market price hits a specific price, known as the “stop level” or “trigger price”.
The most popular type is the stop-loss order, which is triggered by a loss and will turn into a market order once it hits your pre-defined stop level. You can also use this order type to enter a trade at a specified price.
Let’s say you want to buy SIG only if it moves above the high of the previous day to make sure that there’s really enough momentum to move this stock higher.
In our example, the high of SIG was 71.02, so we can specify a BUY STOP order at 71.03, which is $0.01 above the previous day’s high.
By placing a STOP order, we are saying, If the stock reaches 71.03, then buy 36 shares of SIG at 71.03. The advantage of using a stop order is that we don’t have to be glued in front of our computer all day long waiting for SIG to move up and hit our order price. We can go to the beach.
The disadvantage of a stop order is that it’s not guaranteed that our trade gets filled at the specified price, because the stock can gap up from 71.03 to, let’s say, 72. In this case, we would automatically get filled at $72, since we are trading above our trigger price of $71.03
So how can we avoid getting filled at a much higher price? Well, we can use a…
Stop Limit Order
A stop-limit order is effectively a stop order that includes a price limit to define the maximum price at which you are willing to buy the stock.
Here’s an example:
Let’s say we want to buy SIG once it’s moving above 71.03 but we don’t want to pay more than 71.10 for the stock. In this case, we place a STOP LIMIT order with a stop (a.ka. trigger price) or $71.03 and a limit price of 71.10. This way, we only get filled if SIG moves above $71.02 AND we can get filled at $71.10 or lower. By using a stop-limit order, we avoid getting filled at a price we don’t want, e.g. after a gap at $72.
The disadvantage: If the stock rises quickly above 71.03 and “jumps” to 71.20, we might not get filled. But this is a very unlikely scenario. In my experience, you are getting filled at the price you want 9 out of 10 times, and that’s why I like to use a stop limit order for my entries. Let’s quickly talk about the last order type:
A limit order lets you specify a maximum price that you’re willing to buy at.
For example, if we want to buy SIG only if it’s trading below $70, then we would enter a BUY LIMIT order for 36 shares of SIG at $70. We would only get filled if SIG is trading below our specified price of $70. I like to use this type of order for my profit target.
Before we move to the last step of placing a stock buy order, let me quickly summarize how I use these orders:
For my entries, I like to use STOP LIMIT orders. Stop loss, I like to use STOP orders. My profit target, i.e., selling the stock with a profit, I like to use LIMIT ORDERS. Typically, I never use MARKET orders since it doesn’t give me any control over the execution of the trade. Let’s talk about the last step when placing a stock buy order:
5. Duration of the Order: DAY, GTC or GTD
There are three different durations when placing a stock buy order:
If you specify the buy order as a DAY order, the order will be executed today during market hours, or it expires automatically at the end of the day.
As an example, when I place the order to BUY SIG at 71.03 STOP as a DAY order, it will get filled if the stock price moves above 71.03. If it doesn’t, then the order is automatically canceled after the markets close.
I like to use THIS order for entry orders. This way, I know that I am getting filled TODAY or I can look at the stock again tomorrow and decide if I still want to buy it.
GTC stands for “good ’til canceled”. Here’s what that means:
When you set an order as a GTC, it means that this order will stay in effect until it’s either filled OR you change or cancel your order. This type of order is perfect for exits, i.e., stop loss orders and profit taking orders. When using a GTC order, it will remain active until the stop loss or profit target is hit, or until you cancel it manually.
GTD stands for “good-til-date”. When you specify a GTD order, it means that the order will stay in effect until either the expiration date or until it’s filled or until you change or cancel your order. This type of order is useful if you decide to buy a stock for a certain price, but ONLY if you get filled for this week, as an example. You would place an order to BUY SIG at 71.03 STOP – GTD until Friday.
In this case, you would either get filled if SIG moves above 71.03 before Friday, or the order is automatically canceled.
As you can see, there are a few things that you need to pay attention to when placing an order to buy stock. But it’s really not that complicated. Practice on a simulator first to get familiar with the different types of orders.
Learn more about Markus Heitkoetter at Rockwell Trading.