The Beginner's Guide to Making Money in Stocks

History shows that the single worst financial decision you can make – a move all but totally guaranteed to lose you money – is to stay out of the markets altogether.

Not investing is easy: You won’t have to do anything, worry about what the market’s doing, or whether your broker is shooting straight with you... But in the end, you’ll lose the lion’s share of your money to depreciation, inflation, and taxes.

We believe everyone should be invested and actively in control of their own financial destiny. Simply taking that first step, deciding to get invested, can have a phenomenal impact on your life – especially your retirement.

saving-investing-graphicJust have a look at this chart on the left. We think it shows, in the strongest possible terms, why investing is an absolute must.

You don’t have to be rich, you don’t have to make it a full-time job, you don’t have to have been born knowing how to do this stuff, you just have to start.

We’ve made that easier than ever with the free guide we’re giving you today.

This complimentary resource has everything you need to learn how to get started and get in control of your money… investing terms, how to place orders to buy or sell, how to make sure you get the price you want – we’ll even show you how to open a brokerage account and give you a list of brokers.

Let’s get started…

Section 1: Stop & Limit Orders

If You Need a Brokerage

Just follow these simple steps:

  1. Select a suitable broker. Here's a list of online brokers.
  2. Fill out the account application with the needed information: Personal information (including name, address, DOB, contact information) Social Security or Tax ID (ITIN) Employer information (if applicable)
  3. Fund the account using a bank account and routing number, or, if you'd rather, a check.
  4. Try paper-trading some Money Morning picks until you're comfortable investing your own money.

There are only three basic order types in existence: market, limit, and stop orders. Every other order type is an extension of the basic three.

And these orders are made on the basis of your convictions, or beliefs, or – if you're lucky - even hard information that you have. You may have a bullish belief, that is, you expect share prices to rise. Or you may have a bearish belief, where you expect share prices to fall. There are ways to make money in either case, as you'll see.

Starting with the simplest, a market order instructs the broker to get the trade done right now. In other words, the broker tries to execute the trade at the best possible price. One thing to keep in mind is that the broker cannot guarantee the execution price and the last-traded price is not necessarily the price at which the order will be filled.

The other two basic orders are limit and stop orders.

Let's start with a limit order.

With a buy limit order, the buyer sets the order below the current market price because he is looking to buy at the lowest possible price.

The limit price is the maximum price you are willing to pay for a stock, and the broker is instructed to buy below or at a set price once the limit price is reached.

In other words, when you set a buy limit order, you are hoping for a pull-back in the stock before it goes higher. You're bullish on the stock long term but you want a lower price. By setting the order below the current market price, you are effectively taking advantage of short term fluctuations and hoping that the stock will go lower before it goes higher.

Of course, the broker cannot guarantee that the specified price will be reached, and the order may go unfilled.

Here's a perfect example:

Let's assume that you wish to buy 100 shares of AAPL stock currently trading $181 per share. You believe that at $181 per share, the stock is overvalued but at $170, the stock is a good buy.

You would then place a buy limit order @ $170 on 100 shares of AAPL. As long as the stock reaches the limit price, the order becomes a market order and is filled at $170 or below.

Naturally, limit orders are also available to current holders of the stock, which brings us to sell limit orders.

A sell limit order instructs the broker to sell shares at a designated price or higher, effectively placing a limit order above the current market price.

A sell limit order is for those who would like to sell but only at price above the current market price. The limit price is the minimum price you are willing to accept in order to sell your shares and it is a great way to maximize profit-taking.

You may be bearish on the stock, and believe prices will go down. But you believe that market volatility, or changes in price, will push the stock higher, hence offering a better selling point.

For example:

Let's assume that you own 100 shares of APPL stock, currently trading at $181. You would like to sell the shares and take profits if the stock reaches $170, since you believe $170 to be a fair price.

In order to maximize the profit taking, you would place a sell limit order at $170. Once the APPL stock reaches the limit price and remains there, the sell limit order becomes a market order and your request is filled at $170 or higher.

The third and final basic order type is a stop order. There are two sides.

A buy stop order, just like the limit order, tells the broker
to execute the trade at a specified price which is different from current market price.

In this case, the buyer of a stock is placing a stop above the current price and therefore instructing the broker to buy if the stop price is breached.

In other words, the investor is bullish on the stock but wants to buy at a higher price. Now, if this seems counterintuitive, it is. After all, why would any buyer take a higher price over a lower one?

The answer is momentum.

With a buy stop order, an investor is taking advantage of expected upward momentum in the stock and wants to be first in line once the price momentum is confirmed.

By the time other traders are just firing up their brokerage account program, you are already riding the upward trend!

Here is an example:

Let's assume that you wish to buy 100 shares of APPL stock, currently trading at $181, but believe that the stock will really take off once it reaches $189.

In order to be first in line you place a buy stop order $189. Once the APPL stock reaches $189, the buy stop order becomes a market order and your request is filled at next best price.

The last basic order type is a sell stop order, also known as sell stop-loss order.

The sell stop order is intended to protect you from steeper losses as a current holder of a stock and it is placed below the current market price.

Here is how it works...

By placing a sell stop order on your current holdings of a stock, you are instructing your broker to sell a stock below the current price. Once the stock trades at or below the price you have specified, it becomes a market order to sell.

Ultimately, an investor placing a sell stop order is bearish on the stock as he/she believes that it will go down. In order to guard from a possible sell-off, the broker is instructed to sell once the price reaches a predetermined level.

A sell stop order is a way to limit losses and collect profits once a stock is showing downward momentum which could easily turn into large losses.

Here is how it usually plays out:

Let's assume that you own 100 shares of APPL stock, currently trading at $181, and you believe that if the stock reaches $175, it will trigger a much larger sell-off.

To avoid the possible train wreck, you place a sell stop order at $175. Once the APPL stock reaches the stop price, the sell stop order becomes a market order and your stock is sold at $175 or lower.

Regardless whether you are a buyer or a seller of a stock, both limit and stop orders can add value to your portfolio. Broadly speaking, they allow you to close a position automatically once certain conditions are met.

A limit order is intended to help you get more upside and allows you to buy/sell at a specific price or better.

And think of a stop order as a tool to prevent losses from getting worse if prices start moving against you.

Section 1 Review:

Section 2: Combining Stop & Limit Orders

Stop and limit orders, whether one is a buyer or seller, are a powerful risk management tool. But you can combine the two for even more control.

One thing to keep in mind is that a stop limit order, whether one is a buyer or a seller, requires two prices, a stop and a limit price, effectively placing a range above or below a current market price.

Let's take a deeper look.

A buy stop limit order has two advantages:

a) it allows the investor to buy the stock only if it moves higher and

b) limits the price the investor is willing to pay.

By giving your broker a stop price and a limit price, you not only have control over the maximum price you are willing to pay (the stop price), but also when your trade is filled (limit price).

Here is how it would happen:

Let's assume that AAPL stock is currently trading at $181 per share and that you would like to buy it once it shows signs of upward momentum. An investor would give his/her broker a stop price of $175 and a limit price of $185 for example.

If the stock price moves above $175, the stop order turns into a limit order. The order, however, will only be filled if the stock is below the limit order, or the maximum you are willing to pay, in this case $185.

A buy stop limit order is the same as a buy stop order, the only difference is the addition of a limit price, effectively capping the purchase price. The investor is still bullish on the stock and wishes to ride the price momentum but also wants to limit the purchase price.

A sell stop limit order instructs the broker to sell a stock given certain price parameters. As with the buy stop limit order, the sell stop limit order gives an investor control over the price at which the stock is sold and the minimum price he/she is willing to accept.

The investor using a sell stop limit order benefits from a limit on the maximum possible loss, without setting a limit on the maximum possible gain.

Once the stop price is hit, the stop order becomes a limit order and instructs the broker to sell the security at the limit price or better (i.e. higher)

With a sell stop limit order, an investor is effectively placing a floor on the lowest acceptable selling price if a condition is met.

And so:

Let's assume you own 100 shares of AAPL stock, and wish to sell if the stock falls a bit lower. If the stock is currently trading at $181, you would place a sell stop limit order below the current trading price, $175 for example. You would also instruct your broker on the limit or the minimum you are willing to accept. In our case, the limit is $170.

If AAPL stock drops to $175, the sell stop limit order becomes a limit order and your stock would be filled at the next best available price as long as the stock still trades above your specified limit price of $170.

Section 2 Review:

Section 3: Trailing Orders

There's always money changing hands somewhere on Earth, day or night. Money knows no holidays, weekends, or sleep.

But we have to take time off, of course. We can't observe the markets at all times.

Fortunately, we don't have to. We have a "back-up" of sorts for trading: trailing orders.

Think of them as a dynamic band that moves in relation to the share price.

It is a simple idea in which the trade price automatically adjusts as the stock moves higher, enabling an investor to execute a trade at or around a set price.

But there is one particular reason why trailing orders,
trailing stops in particular, are such a great tool and it has to do with human nature.

Numerous studies in behavioral finance have shown that people have trouble cutting their losses and hang on to loosing stocks for too long.

Go figure!

It seems that we are wired to feel losses more intensely then gains, and as a result, tend to stay optimistic even as our returns approach zero.

I think we have all been there, believing that things are going to turn for the better at any moment. Unfortunately, most often they do not.
This is why trailing orders are a very effective management tool; they take human greed and emotion out of the equation.

Setting a trailing stop early in the process prevents you from falling into this behavioral trap. Here is how the pros do it...
As a buyer, an investor can use trailing orders in one of two ways. He, or she, can set a trailing stop or a trailing stop limit order.

Let's begin with trailing stops.

A trailing stop order is a special kind of a stop order. The only difference is that the trigger price in a stop order stays the same, while the trigger price in a trailing stop order can change with the market price.

Naturally, both a current holder and a buyer can use trailing stops.

The seller of the stock places the trailing stop to sell order below market price in order to get out of the stock if the stop price is reached. The stop price will rise as the market price increases, but will remain unchanged as the market price drops.

The stop order becomes a market order once the market price converges with the stop/trigger price, as in the graphic at right.

The benefit of this type of order is to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain.

An example illustrates the benefits of a trailing stop to sell order very well:

Suppose that you're a holder of a stock XX, which currently trades at $10. By placing a $3 trailing stop you are effectively capping your losses. If the stock drops to $7, your order will be filled. However, if the stock increases before it drops, the stop price will be reset and you will receive a higher price.

If the stock increases to $15 and consequently drops to $12, your order will be filled.

And trailing stops are incredibly versatile; they can be set as dollar or percentage amounts.

The key is to set the level amount at a level that is neither too tight nor too wide. If the level amount is too close to the current price, the chances of being stopped out of the trade to early increase.

If the stop level is set too wide, the chances are that the investor is leaving to much money on the table.

A trailing stop to buy order sets the trigger price above the market price by a specific trail amount and the order is activated when the market price hits the trigger price. As the market price decreases, the stop price is lowered, but does not increase the stop price as the market price increases. (See visual at right)

Once the market price hits the stop price, the order converts into a market order to buy at the best available price.

For example:

Suppose that you have your eye on a stock that trades at $10, but over thelast month, it has dropped from $20. While the stock is falling, you might speculate that the stock is likely to rise again, and you would like to play the volatility and places a trailing stop amount at $3.

The order will go through anytime the security gains $3 over the lowest market value. The order could go through at $13 but it could also go through at $8, if the stock price drops to $5.

The obvious advantage of a trailing stop to buy order is it allows an investor to buy at the right time, i.e. when the stock has fallen and begins to rise.

The second type of trailing order is a trailing stop limit order.

A trailing stop limit order works the same way as a trailing stop order, but instead of a market order being triggered, a limit order is sent to the exchange.

Once again, the investor is looking to sell or buy at the most opportune time without foregoing the upside.

The benefit of adding the limit price is the ability to indicate the lowest price you are willing to accept when selling, after the price has already dropped by specified trailing amount.

A seller is effectively saying, "If the bid price falls to my trigger price, I want to sell, but I only want to sell if I can get this limit price or higher."

Here is an example to that highlights the benefits of a trailing stop limit sell order:

Imagine that you are currently a holder of XYZ stock currently trading at $100. You are bearish on the stock in the long term, as you believe that the price will decline. In order to limit your losses, you instruct your broker with the following: Trailing Amount = $20 and Limit Offset = $5

The Limit Offset tells the broker how much less than the stop price you are willing to sell for.

As the market price increases, the stop price and limit price will increase by the predetermined amount. However, the stop price will remain unchanged as the market price decreases.

Assuming that the price drops to $80, the stop order will become a limit order, instructing the broker to sell at $75 or higher.

Switching over to an investor who wishes to buy a stock, a trailing stop limit order to buy is normally used in conjunction with a short position on a security.

Here is why:

As the market price increases, and ultimately converges with the stop price, the order becomes a limit order to buy at the limit price, which is set higher than the stop price. The limit price is based on the predetermined limit offset amount, effectively telling the broker the highest price at which the investor is willing to buy.

With a trailing stop limit order to buy, an investor wants to buy at a higher price, but only up to a certain point, or the limit price.

Let's look at an example:

Let's say you would like to buy XYZ stock currently trading at $100. You are bullish on the stock in the long term, and believe that the stock will take off once it reaches $110. In order to ride the upward momentum, and be first in line, you instruct your broker with a trailing stop limit order to buy and the following instructions:  Trailing Amount = $10 and Limit Offset = $5

The Limit Offset tells the broker how much higher than the stop price you are willing to go, before you are no longer a buyer.

Assuming that the price reaches $110, the stop order will become a limit order, instructing the broker to buy up to $105, or lower.

Section 3 Review:

Section 4: About Conditional Orders

There are just a few more orders to consider; the conditional orders. They're easy to learn, and they can all be grouped together because they all have a very similar purpose.

Conditional orders work alongside the market, limit, and stop orders we've discussed here.

These orders take into account issues like trading volume and how long you'd like the order to be active. They provide a bit more specific guidance and instruction to your brokerage.

Briefly, they are:

Conclusion: A Final Thought

Well done! You're armed with the knowledge you need to begin trading for yourself. There's just no better way to take control of your own future.

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