How to Buy Stocks

If you don't have an account with a stock brokerage firm and you want to buy stocks, the first thing you need to do is decide if you want an account with a full service brokerage firm, a discount brokerage firm, or both!

The Choice Depends on the Individual!

Are you the type of person who wants research reports and advice?

Are you the type of person who knows what to buy and just needs the stockbroker to take the order and get it filled?

Or do you want to place a few trades through each and have access to research reports from the full service broker?

The choice is yours! Remember that a full service broker is going to charge you more than a discount broker.

Setting up the account is relatively easy.

Once it is done, you can call up and buy and/or sell stock.

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Types of Orders You Can Place:

The "Market Order" is probably the most common. When you place an order at the market, you are telling the broker to buy or sell the stock at the best possible price at that time.

A market order will always be filled. The catch is that it may not be filled at the price you expected or wanted.

For instance, you want to buy shares of the XYZ company. You call your broker and he tells you that is currently trading at 95 bid 96 ask.

The bid is the price the buyers are willing to buy the stock at. The ask is the price the sellers are is willing to sell the stock at.

You tell him to buy 100 shares of XYZ at the market.

When the broker gets back to you, he tells you that he bought 100 share of XYZ at 97!

What happened? Between the time you gave the broker the order and the order was filled up, the price went up.

Keep in mind, that the price of XYZ could have easily been filled at 94 had more people been selling rather than buying at that time.

A "Limit Order" is an instruction by you to your broker to buy or sell a specific amount of stock at a specific price or better.

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If the price you specify is not within the current market quote, it is said to be "away from the market" and will be entered beneath any other orders.

What this means is that there are shares ahead of you. Orders get filled in the order that they were received. This happens quite frequently. There is no guarantee that a limit order will ever be filled.

When deciding whether to place a limit order or a market order, the trader needs to evaluate the tradeoff between a guaranteed fill which might be different than what you expect, and getting the price you want but perhaps not getting filled.

It all depends on your analysis and your needs ...

How are Stock Prices Set?

The market value of any stock which is the price people are willing to buy and sell it for, is strictly a function of the marketplace.

Stocks are just like any other commodity. Buyers and sellers come together in a competitive marketplace and transact business at mutually agreeable prices.

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Supply and Demand rule the stock market, as all other free markets. At times investor demand drives prices beyond reasonable valuations, while at other times investor disinterest pushes stock prices lower and lower.

Types of Markets:

We all know the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and NASDAQ, which encompasses the Over-the-counter (OTC) market. But how do they differ, and how do they work?

Physical exchanges such as the NYSE and the AMEX trade in listed stocks, in an auction type of manner.

Buyers are matched with sellers by a specialist, who is solely in charge of trading a particular stock. In this function, the specialist's job is to maintain an orderly market.

In the OTC market, which does not have one specific physical location, dealers negotiate on behalf of their clients and themselves.

While specialists also take possession of the stocks they trade on occasion, market makers do so without exception.

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They buy and sell the stock they make a market in for their own account, and they trade based on their own inventory.

There may be many market makers for one stock.

NASDAQ also handles listed company trades, referred to as the third market. A fourth market matches private trades between buyers and sellers.

Besides market makers, other participants in the NASDAQ system include order entry firms and Electronic Communications Networks (ECNs).

Each type of market has its own specific listing requirements, with the NYSE being more stringent in this regard.

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