Let’s get into the basics of buying stocks, and learn some of the common terms used. As you learn how to buy stock, you may hear some terms that you haven’t heard before.
What is a stock?
Publicly traded companies and corporations can be broken into shares of stock. When you buy a stock, you are buying a share in ownership of the company. The more you buy the more own that company.
Why would you buy a stock?
Stock traders buy stock when they think it is going to go up in value. They might think that the company is undervalued, or maybe that a product they are selling is going to be a big seller. Maybe you see that the market has crashed, and you feel that maybe a particular company has stock that is unusually low right now.
Below is a screen shot from my tastyworks account. At the time I wrote this article, Apple, whose ticker symbol is AAPL, was trading at $174.37 per share. If I wanted to buy 100 shares, it would cost $17,437.00, plus tastyworks low commission of $5.00, and a fee of $0.08. So the grand total for my to buy 100 shares of AAPL would take $17,442.08
When you buy the stock, the transaction is called a debit. When you own or hold a stock you are said to be “Long” the stock. You place the order with your broker, they will take the cash from you account and exchange it for an equal value of stock shares and put them in your account, plus charge a small transaction fee. I highly recommend tastywork brokerage, they have the lowest commission to buy stocks, and charge zero commission to sell your stocks
There is no limit to how high a stock can go, so your max profit is limitless You may have heard the secret to stock market success is buy low and sell high, if only it were so easy!
The most that you can lose on the stock, is the amount that you paid for that stock. If the stock price goes to zero, you lose all of your investment.
Why would you sell a stock?
You sell a stock when you think it is going to go down, or maybe you feel that it won’t go up anymore, or perhaps you just need to free up some capital for a better investment.
When you sell a stock, it is called a credit. Your broker will sell the stock on your behalf, and deposit the cash equivalent into your account, sometimes deducting a commission. This is how you exit the position.
Pros of Buying Stock
- There is no limit on how much you can make. The stock can keep going up.
- Your risk is limited to the price that you pay for the stock. Your max risk is defined when you make the purchase.
Cons of Buying Stock
- Buying stock shares can be expensive. It can be really hard to start making money in the beginning, especially if you have little to invest. Plus, if you aren’t using tastyworks, the fees to buy and sell can take up a lot of your earnings.
- You can only make money if the stock goes up.
- Stock – represents a unit of ownership in a company
- Debit – in this instance refers to a decrease in cash, in exchange for an investment such as shares of stock.
- Credit – in this instance refers to selling an investment in exchange for cash.
- Long – being long means you are holding an investment, in the hopes that it will go up in value.
Have you ever heard the term “Go short?” In the next lesson, I explain what that means, and how you can benefit from downward moves in stocks.