The Basics of Investing 106: Buying and Selling Stocks

By Cindy Diccianni RN, CSA, CLTC, Financial Advisor

In the first five parts of our series we discussed the "Investment Pyramid" and the fundamentals of investing. Also discussed, were the concepts of safe or liquid investments, the role of bonds, growth and income investments and the higher risk investments like stocks and futures. We will now further discuss the actual buying and selling of stocks.

The Stockbroker

Generally, you buy and sell stock by placing an order with a stockbroker. Brokers go through training and testing to qualify for various kinds of securities licenses. One organization that administers proficiency exams is the National Association of Security Dealers (NASD). By passing the Series 7 exam, a broker becomes a Registered Representative of the NASD.

Your options are to choose a full service broker or a discount broker. A full service broker will assist you in the buying and selling of a stock and will provide you with advice about a stock. They charge a commission for their service and will execute the trade for your account on your behalf. A discount broker will not provide advice and research for your stock but will execute the trade for you for a lower fee. The assumption here is that you have done your own research on the investment.

A full-service brokerage firm usually has a staff of investment analysts who are assigned to follow various industries and companies in order to compile investment information on them. A full-service broker can provide advice based on these reports. In particular he will tell you whether his firm's research indicates that a company's stock seems to be overvalued (overpriced), undervalued, or fairly valued. There are two basic kinds of investment research:

1. Fundamental analysis, which is an analysis of the company itself, its operations, its position with in its industry.
2. Technical analysis, which is an analysis of the company's stock, its price, its price movement, its trading volume, etc. This type of analysis is more company specific and more individualized.

A full-service stockbroker is a sales person first and an advisor second. A broker of this type may sincerely want to help you achieve your goals, but in order to make money he must sell his product. It is important for you to understand this distinction. A full-service broker is paid entirely on a commission basis so they make money on the stock transactions and may encourage you to buy and sell stocks when you really ought to hold on to the ones you have.

On the other hand, a Registered Investment Advisor is an adviser that charges a fee directly to you, rather than receiving commissions on sales, and constructs a plan that will achieve both your financial and personal goals for the future. The Registered Investment Adviser is often an independent practitioner and offers portfolio management for many types of clients. In addition to your financial goals and dreams, they consider your tax and estate planning needs when developing your individual plan and when making recommendations for investing. For this reason investment advisors can offer you a non-partial approach to your investing. This is a huge distinction and the differences can be substantial on a long-term basis.

Ordering and Selling Stocks

To place an order you can call over the telephone or place the order directly through your computer. Some necessary terminology to know in reference to placing an order includes:

* Market order-the buying or selling shares of stock at the current available price. You assume your order will be executed as soon as possible.
* Limit order-You want to buy or sell when the stock reaches as certain price. You will not buy or sell if the specific price is not reached.
* Stop order-Your order to buy or sell at a specific price changes to a market order when the specific price is reached.

In addition to these three basic kinds or orders, you can attach a time limit to your order. A day order is only good for that day or the day it is entered. When the market closes that day, the order is cancelled if not executed.

Stocks are also purchased in lots of 100 shares called "round lots." You can have an "odd lot" of shares which are shares that are not in even lots of 100. The "round" or "even" lots are easier to sell if the market should take a downturn or the stock loses its demand.

Filling an order is a much simpler process with the magic of computers. In a matter of minutes, the order can be executed. If the security is listed on the New York Stock Exchange (NYSE) or the American Stock Exchange, a specialist handles your order. A specialist acts as an agent, who matches buy and sell orders together to complete those transactions. If it is a stock that is listed on the NASDAQ, it is handled in the over-the-counter market via a bid and ask price system that is computerized.

Institutional investors make up approximately 75-80% of all stock market trading; they include banks, bank trust departments, mutual fund companies, pension funds and insurance companies. They have a strong influence in the market and often create price fluctuations of a stock.

Brokerage Firms

The last concept we need to discuss is the type of accounts that you can have with a brokerage firm. These include cash accounts and margin or credit accounts. A cash account means that you will be required to pay for your securities as you purchase them. Margin or credit accounts are for more sophisticated investors, who are actually borrowing money to purchase securities. Margin accounts can be called (additional money would need to be deposited) if the account value falls in a declining market.

As you can see, buying and selling of stock can be a complex process. Often the individual investor gets caught up in the hype of a stock and the price falls faster than they are able to sell their shares. They tend to suffer more in a flat or fluctuating market or when an individual stock is moving in price up or down quickly. Also as an individual investor your portfolio may not be properly allocated and can vary in value based on market changes. This can leave you at risk in a fast moving market. Remember to take these possibilities into consideration before investing. Consult your financial advisor for additional information.

Copyright, Cindy Diccianni

Cindy Diccianni is a Registered Nurse, a Certified Senior Advisor (CSA), a Certified Long Term Consultant (CLTC), a Registered Investment Advisor and a Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc. and co-founder of Nurturing Your Success, Inc. Her passion is assisting clients in creating financial freedom. Visit Cindy at www.nurturingyoursuccess.com, write to her at Cindy@... or call her directly at (610) 251-9393.

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