Trading Up-Close: How to Buy Stock
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Onscreen text: Trading Up-Close
Onscreen text: How to Buy Stock
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Onscreen text: Kevin Horner, Senior Manager, Trading Services Education
KEVIN: Part of a disciplined and systematic approach to trading is analyzing the current value of any stock before you buy it. Traders do this in two ways …
KEVIN: … with fundamental analysis and technical analysis.
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KEVIN: Fundamental analysis is a way to assess a company, using factors such as revenue and earnings growth to see if conditions at a company are improving, stable, or deteriorating.
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- Longer hold times
- Avoid weak companies
- Focus on financial strength
- Determine price value
KEVIN: When traders are planning a longer hold time, they often use fundamental analysis to eliminate potentially weak companies and focus on those that show better financial strength. They also use it to determine if the stock’s price may be a good value at the moment …
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- Determine price value
- Price to earnings
- Price to sales
- Price to book value
- Price to earnings growth
KEVIN: … by looking at measures such as the price to earnings, price to sales, price to book value, and price to earnings growth. For short-term trades, it’s all about price.
Onscreen text: Technical analysis
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Assumes information is baked into price
Insight into possible moves
Removes emotion from decisions
Trade based on perceived risk and reward
KEVIN: And traders use technical analysis to track price and volume over time to try to determine which way the stock might move and where they want to enter and exit a trade. Technical analysis assumes that all the available information is already baked into the price. It can provide an idea of where a price move may stop or break to a new level. Instead of being emotionally swayed by the news, they can stay focused on price data and make trades based on perceived risk versus reward.
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Amount willing to lose
Amount hoping to gain
KEVIN: The risk being how much you’re willing to lose on a particular trade, and the reward being how much you’re hoping to gain. Your trading style will determine whether you use fundamental or technical analysis, or a combination of the two. Technical analysis can help you decide what to buy and when, based on price. But what about how much to buy?
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KEVIN: You can calculate that with two important numbers:
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Onscreen text: $ at risk per share
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Onscreen text: Max $ loss per trade.
KEVIN: … how many dollars are at risk for each share, determined by your risk-reward ratio, and the maximum loss per trade you set in your plan.
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KEVIN: Divide the maximum loss by the dollars at risk per share to see how many shares you can purchase without risking more than you can stand to lose.
KEVIN: When you are ready to buy, you can use one of four common order types: market, limit, stop, and stop-limit.
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Execute order at next available price
KEVIN: Market orders execute almost immediately during normal market hours, at the current price. However, depending on how fast the market is moving, that price could be higher or lower than the last price you saw. Essentially, this order says, “I want these shares now―the price is not important.”
Onscreen text shifts so that “Market” and its bullet point below move up and get smaller. “Limit” moves from the bottom.
- Set a max price you will pay
- Day order or good-till-cancelled (GTC)
KEVIN: If price is important, use a limit order to set a maximum price you will pay. If your order is filled, it will be at your limit or better. But there is no guarantee your order will be filled. Depending on how long you think it might take to get the price you specify, you can set this as a day order, which stays in effect throughout the regular market hours, or you can place a good-till-canceled order, which can remain active for weeks or months, depending on your broker.
Onscreen text shifts so that “Limit” and its bullet points shift up and get smaller. “Stop” moves up from the bottom and gets bigger.
- Set a min trigger price
KEVIN: A buy stop order is an order to buy a stock at the market price once the stock trades at or above a specified price—known as the trigger price. Traders use the buy stop order when they believe that if a stock breaks through a certain price, it will continue to rise. Remember that there’s no guarantee that a stop order will be executed anywhere near the stop price.
Onscreen text shifts so that “Stop” and its bullet point move up and get smaller. “Stop-limit” moves up and gets bigger.
- Set a min trigger price and max limit price
KEVIN: A buy stop-limit order combines a stop order and a limit order and works to keep traders from overspending. Both a trigger price and a limit price are set. That way, the trade is executed once the trigger price is met, but only up to the limit price. This is another case where trade execution is not guaranteed, but it does ensure that if executed, the price is at or better than the limit price.
KEVIN: One thing that can’t be stressed too much is the importance of knowing your exit strategy before entering a trade. Watch the next video in our series to learn how to sell.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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