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Lesson 3: Buying Shares

Lesson 3: Buying Shares

Once you have decided you are comfortable with the risks involved in buying shares, your next step is to start understanding the process.

Shares represent a unit of ownership in a company – and they are one of the most popular financial instruments out there. Shares will rise and fall in value according to how well a company is seen to be doing. Better-than-expected earnings will make share prices rise, while weaker earnings might make share prices fall – but there is a wide range of reasons why a company’s share price can change.

How to Buy Shares Online

Here is a step-by-step guide to buy shares online:

  • Step 1: Open a trading or investing account
  • Step 2: Research and select your stocks
  • Step 3: Decide how many shares to buy or trade via CFDs
  • Step 4: Choose your order type and open your position
  • Step 5: Choose when and how to sell shares

Step 1: Open a trading or investing account

How to buy shares step 1

Wondering where to buy shares? Movies love to show frenzied traders shouting orders on the floor of the New York Stock Exchange, but these days very few stock trades happen this way. Today, the easiest option is to buy shares online through trading or investing accounts.

People have two options to buy shares of stock online. Firstly, they can buy shares in companies on the exchanges where they are listed. For instance, you can buy Tesla, Amazon, or NIO stock on the NASDAQ exchange, so you own a share in the company (investor). Alternatively, they can speculate on the rising and falling prices of the underlying asset (trader).

Investors buy shares outright in the hope that they will increase in price and can be sold later for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer period, attempting to profit from share price changes as well as dividend payments.

Related: How to invest in stocks

Trading stocks means that you are speculating on a share’s price movements with derivatives like CFDs (contracts for difference) – without taking direct ownership. CFDs are leveraged products, which means that you will not need to commit to the full value of the position. But bear in mind that leverage can increase both your profits and your losses.

Related: How to trade stocks

With CFDs, you can open a ‘buy’ position (go long) with chosen shares if you think the stock’s price will rise, or you can open a ‘sell’ position (go short) if you think the stock’s price will fall. Shorting with derivatives in case the market will move in the same direction as an open position can be an effective way to hedge against downward price movements in your non-leveraged investment portfolio, or it can be a way to generate profits outright from shares that are falling in value. But when you go short your potential losses are theoretically uncapped because there is no limit on how high something’s price can rise.

Related: What is CFD trading and how does it work

When you create a trading account with CAPEX, you will be able to:

  • Open following positions: ‘Buy’ (go long) or ‘sell’ (go short) on CFDs for over 2,000 international shares to speculate on their price rising or falling
  • Trade a host of CFDs on global indices to go long or short on the performance of an entire economy with a single trade.
  • Take a position on CFDs from our range of ETFs to get exposure to a basket of shares from an entire country, index, or sector that could be rising or falling in price
  • Trade CFDs on the world's most powerful companies in simple pre-built portfolios based on specific industries and trends - social media, memes, electric vehicles, and everything else that echoes in the world.

Step 2: Research and select your stocks

How to buy shares step 2
Once you have set up and funded your brokerage account, it’s time to dive into the business of picking stocks. A good place to start is by researching companies you already know from your experience or research you already made.

Do not let the deluge of data and real-time market gyrations overwhelm you as you conduct your research. Keep the objective simple: You are looking for companies of which you want to become a part-owner.

Warren Buffett famously said, “Buy shares into a company because you want to own it, not because you want to go up.” He has done well for himself by following that rule.

The 1st criteria

Start with identifying the currencies you want to represent in your portfolio, then you allocate a percentage of your portfolio to each one, and finally, you research the individual shares that provide that given percentage exposure. That is the initial idea, as a promising investment denominated into the wrong currency may become a bad investment and vice-versa.

a) Identify the right currencies

  • Study currency market weekly or monthly charts or representative currency indexes for your projected holding period. If you’re planning to buy and hold stocks for months to years, you want to see trends over the prior few years. For support, read also what is forex and how does it work.
  • Identify the currencies with the healthiest uptrends over that period.
  • Check that the underlying national economic fundamentals support that trend with good growth, or at least consistently low ratios of debt to the gross domestic product (GDP) and culture of fiscal discipline, not growing budget and trade deficits.

b) Allocate a percentage of your portfolio to each currency

Allocate percentages of your portfolio to instruments denominated in or tied to those currencies that are more likely to appreciate in the long run.

c) Choose the individual shares that provide that given percentage exposure

Then shop around for specific assets you want that are denominated in or exposed to those currencies so that you have a set portion of your portfolio in assets tied to those currencies.

The 2nd criteria

Here is a quick summary of what to look especially when you buy shares to hold, keeping in mind the points discussed above.

  • Dividend yield over 5%, but the payout ratio is below 100%.
  • Average volume over 300,000 shares.
  • Priced over $2, no penny stocks.
  • IPO date more than a year ago; preference is given to stocks that have been publicly traded for 10 years or more.
  • P/E greater than zero (shows the company is profitable). Consider looking for stocks with a low P/E, for example, greater than zero but less than five. Also, consider looking at stocks where the Forward P/E is lower than the current P/E. This shows earnings are expected to increase, and if they do the stock is a better buy at the current price.
  • Operating Margin Over 10%.

The 3rd criteria

View charts of the shares produced by the screener above. The next criterion for buying shares is:

  • Only buy shares at the major long-term support area. We want to buy shares at cheap prices (compared to historical values), not expensive prices. Investment trades don’t require a stop loss, but you should have a price in mind where you get out if conditions don’t improve for the stock. An investment doesn’t mean you hold it forever if it doesn’t do what you expect. Have a low tolerance for shares that keep dropping.

Also, have an exit plan for how you will exit a profitable investment. Define how and why you will exit. Since we used support to get into the investment, you may consider exiting just below a long-term resistance level. Once you are out of your investment, don’t worry about what the shares do after. Take the money and if you wish to buy other shares, go through the same process again, as discussed above.

This brings us to one final guideline for buying shares:

  • If buying shares at support and planning to exit just below resistance, the upside potential should outweigh the downside risk by at least 2:1. That means that if you buy shares at $50, you should be able to get out of the stock at $45 or higher. You limit your potential loss at $5 a share if based on the historical chart it is quite feasible to make $10/share or more. So, when you buy shares the distance from the entry point to the resistance (profit target) should be at least x2 the distance from the entry point to the support level (potential loss). This is known as the risk/reward ratio.

Once you fund your trading account with CAPEX, you will gain access to a portfolio builder, designed to remove the guesswork from investing. QuantX helps you cover the popular industries and only invest in the top-performing stocks.

>> Create Your Portfolio

Step 3: Decide how many shares to buy or trade via CFDs

Buying Shares step 3

You should feel absolutely no pressure to buy a certain number of shares or fill your entire portfolio with stock all at once. Consider starting small by purchasing just a single share to get a feel for what it is like to own individual stocks and whether you have the fortitude to ride through the rough patches with minimal sleep loss. You can buy more over time as you master the process. If you chose to trade CFDs on shares instead of buying them, make sure you understand the risk associated with leverage trading.

To decide on your position size, follow these 3 criteria:

The 1st criteria

Determine the cash value of the 1 to 3 percent maximum loss you can afford. The larger the account, the wider the risk you can afford, and the more choices of trades you have available to take. Consider the equity, not the account balance.

The 2nd criteria

Pre-define the potential risk or loss you accept in each position. The wider the stop loss, the smaller the position size (number of shares) you can afford without exceeding that 1 to 3 percent. The tighter the stop loss, the larger the position size you can afford without exceeding that 1 to 3 percent. Consider the next key support level where the market conditions will change.

Related: How to use Stop Loss in Trading

The 3rd criteria

Determine the size of the position you want to open. All focus is on ensuring that your stop-loss setting does not risk more than 1 to 3 percent of your capital and that gains per winning trade are much larger than losses per losing trade.

For the sake of illustration, let us suppose your equity is $5.000.

  • the maximum loss you can afford is $150, or from $50 to $150.
  • if you want to buy shares of ABC stock at $54 and the key support level is $50, you might set your stop loss at $49. That means a $5 risk.
  • the maximum number of shares to buy or CFDs to trade is 30.
  • the profit target should be at least $10 above the entry point or a minimum of $64.

Step 4: Choose your order type to buy or trade CFDs on shares

Buying shares step 4

Terms like “market order” and “limit order” may sound complicated but, they are simple concepts that you can understand with just a little bit of work after you learn how to buy shares or trade CFDs on shares (previous steps). Most investors won’t encounter more than a few of these types of trades, but it’s smart to think of them as potential tools in your stock trading arsenal.

Market Order

One of the ways to buy shares online is a market order. Market orders simply tell your broker that you are willing to take whatever price is presented to you when your order is executed. These orders are often subject to the lowest commission since they are the easiest to execute.

Imagine you want to buy 100 shares of Tesla (#TSLA). The current market price is $953.40. You log into your brokerage account and place a market order for 100 shares of Tesla, ticker symbol TSLA. By the time the order is executed a few milliseconds later, the market price may be higher or lower: $953.50 or $951.60, for example. Your total cost before commissions will vary accordingly.

You can also use Market Order while trading CFDs.

Limit Order

A limit order allows you to limit either the maximum price you pay or the minimum price you are willing to accept when buying or selling shares. The primary difference between a market order and a limit order is that your broker cannot guarantee that the latter will be executed.

Imagine an investor is worried about buying NIO shares for a higher price and thinks it is possible to get them for a lower price instead, it might make sense to enter a limit order. If at some point during the trading day, NIO drops to the lower price or below, the order will be triggered, and the investor will have bought NIO at the specified pre-set limit order price or less. Of course, this also means that if at the end of the trading day, NIO does not go as low as the investor's set limit order, the order will be unfilled.

The risk inherent to limit orders is that should the actual market price never fall within the limit order guidelines, the investor's order may fail to execute. Another possibility is that a target price may finally be reached, but there is not enough liquidity in the stock to fill the order when its turn comes. A limit order may sometimes receive a partial fill or no fill at all due to its price restriction.

You can also use Limit Order while trading CFDs.

Stop Orders

In common parlance, stop and stop-limit orders are known as “stop-loss” orders because speculators use them to lock in profits from profitable trades. Most investors don’t concern themselves with these kinds of orders, but it’s worth understanding how they work.

A stop order automatically converts into a market order when a predetermined price is reached (this is referred to as the “stop price”). At that point, the ordinary rules of market orders apply; the order is guaranteed to be executed, you simply don’t know the price – it may be higher or lower than the current price reported on the ticker symbol.

Contrast that to a stop-limit order, which automatically converts into a limit order (not a market order) when the stop price is reached. As discussed above, your order may or may not be executed depending upon the price movement of the security.

You can also use Stop Orders while trading CFDs.

Step 5: Choose when and how to sell shares

Buy shares order type

Much is made about buying or trading CFDs on shares; investors tend to put far less thought into how to sell shares.

That is a mistake, as the sale is when the money is made. Getting it right can be key to claiming your profits — or, in some cases, cutting your losses.

Three steps to selling shares:

Check your emotions

There are good reasons to sell shares and bad reasons.

Ongoing mediocre performance relative to the competition, irresponsible leadership, and management decisions you do not support may all make the list of good reasons. You have decided your money would do better elsewhere, or you’re harvesting losses to offset gains for which you will owe income taxes.

Bad reasons typically involve a knee-jerk reaction to short-term market fluctuations or one-off company news. Bailing when things get rocky-only locks in your losses, which is the opposite of what you want. (You know the saying: Buy low, sell high.) Before you sell a stock, go over your reasoning to ensure you’re not giving in to an emotional response you might later regret.

Decide on an order type

If you’re familiar with buying stock, you’re familiar with selling it — the options for order types are the same. The goal, however, is different: You use order types to limit costs on the purchase of stock. On the sale, your main objective is to limit losses and maximize returns.

Let’s go through some examples. Say you have a stock with a current market price of $40.

Market Order

The order will execute within a few seconds at market price. You may sell for $40, slightly more or slightly less — stock prices can fluctuate in the time it takes to place and execute the order.

The risk: Your stock could sell at any price, with no restrictions.

Take Profit (Limit Order)

You set a limit price to maximize the profit and the order will execute only if the stock is trading at or above that price. If your limit order is for $50, your order will execute only if the stock trades at or above $50.

The risk: You could end up not selling if the stock never rises to your limit price or partially selling if there is not enough liquidity.

Stop-Loss (Stop Order)

You set a stop price to limit the loss and your order will execute only if your stock begins trading at or below that price. If your stop price is $38, your order will execute as a market order if the stock price falls to $38 or less.

The risk: You could sell for less than your stop price — there is no floor. Also, a temporary drop in price may trigger a sale when you do not want it to.

Final words about buying shares or trading CFDs on shares online

We hope the purchase of your first share marks the beginning of a lifelong journey of successful trading and investing. But if things turn difficult, remember that every investor — even Warren Buffett — goes through rough patches. The key to coming out ahead in the long term is to keep your perspective and concentrate on the things that you can control. Market gyrations aren’t among them.

What you can do is:

  • Make sure you have the right skills. CAPEX Academy can help you master the essentials of trading and investing.
  • Be mindful of brokerage fees. These can significantly erode your returns.
  • Consider diversification. ETFs (Exchange-Traded_Funds) allows you to buy many stocks in one transaction.

Compete Risk-Free with $50,000 in Virtual Cash

Put your trading skills to the test with a risk-free demo account. Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you’re ready to enter the real market you’ve had the practice you need.

The information presented herein is prepared by CAPEX.com and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only and as such it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.

Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.
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