Last week I talked to you about the types of brokers you can use and how to choose an online broker that’s right for you.
If you haven’t already, please read the first part of my “How To Buy Your First Stock” series to catch up with our conversation.
Today I want to walk you through the third thing you need to know before buying your first stock…
Step 3—The Sign-Up Process
If you know how to shop on Amazon, then you should have no problem setting up an online brokerage account.
It’s a straightforward process that requires just a few documents and only takes minutes.
Along with the usual personal information, you will also have to provide your Social Security number (tax ID for non-Americans), a picture of your ID, and proof of residence.
For the proof of residence, you can use a utility bill, a bank statement, or a letter from the government. To be eligible, the proof should contain your full name and address and be no more than three months old.
Most brokers these days also require you to provide the bank account you’re going to use for funding and withdrawals. Once you decide on the account you want to use and register it, as it were, with the broker, it will be difficult to change it. You want to make sure to get this right from the start.
Step 4—Conquering The Trading Software
Now that you’re set up with a broker, it’s time to make your first order.
This is where the process can become intimidating. Looking at a trading screen for the first time can be overwhelming. I know the feeling.
You should recognize that online brokers create their software for use by a variety of traders, so you don’t necessarily need every function on display. Understanding the basic terms should serve you fine.
One of the first things you’ll notice is that there are two prices for each stock. These are the Bid and the Ask price.
The Ask price is what you must pay if you want to buy the stock. The Bid price is how much you are going to get if you sell the stock. The difference is the Bid-Ask Spread. It is usually negligible but can increase if you’re looking at a stock that doesn’t trade actively.
Next you’ll notice options for the types of orders you can use to execute a trade.
If you want to buy at the price you see on your screen, then you choose a Market order. If, however, you would like to buy the stock at a specific value, then you select a Limit order.
You should also be aware of the Stop-Loss order option. It’s an essential tool for effective risk management. When the price falls below a certain level, a Stop-Loss order automatically sells your stock, protecting you from potential further decline. Usually, you set a Stop-Loss after you’ve purchased a stock.
Finally, orders differ as to expiration date.
A Day order, as the name suggests, expires at the end of the trading day. On the other hand, a Good ‘Til Canceled, or GTC, order lasts until you cancel it. Be careful, though. Brokers usually cancel GTC orders once per year, every half-year, or every quarter.
How I Pick Winning Stocks
And that’s how you buy stocks these days. Beyond that, it’s just about finding the right ones to buy.
I identify the stocks I want to buy using my MSFTs (misfits) system. It’s a four-step approach that helps me find undervalued stocks in any market.
In Step 1, I look at macro conditions. No company, no matter how big, is immune to currency fluctuations, central bank policies, and capricious politicians. Before I do anything, I identify the direction in which macro forces are moving the markets.
In Step 2, I look at sector potential. Which market sectors are best positioned to benefit from the underlying macro conditions. Finding the right industry helps me identify trends before they develop fully. Moreover, it helps me narrow a list of potential candidates.
Step 3 is all about comparing the companies to each another to find the one with the best fundamentals. I am only interested in healthy stocks with high intrinsic value.
Which brings me to Step 4—finding the right time to enter a trade. A trigger. I do this by analyzing the stock chart and applying technical analysis. I know how I feel about the stock, and price action tells me what the rest of the market thinks about it.
A candidate must pass all four filters for me to consider it a misfit. Otherwise, I am not interested. The stock might go up, but the price doesn’t justify the risk associated with it.
If you want to learn more about trading, take a look at my article How To Make Money In The Stock Market—The Truth.