| The Basic Functions | | | | specified your order to be active for (usually 1-30 |
| The old standard was to pay a broker to make | | | | days). Remember that a Stop-Limit Order is just a |
| transactions and do trading for you. But with the | | | | combination of the two. When the stop price is |
| emergence of the Internet people can do their | | | | reached it then converts into a Limit Order. So if |
| trading electronically for as low as $6.95 a trade. | | | | AMD were to hit the stop price of $20.50 it would still |
| People think this is a great deal so they eagerly jump | | | | fill the order even if it dropped below $20.50 before |
| into the stock market without having any prior | | | | filling. In fact, your order would be converted to a |
| knowledge whatsoever of what they are doing. And | | | | Limit Order so it would continuously try to buy AMD |
| what once looked like a great deal has turned over a | | | | until it exceeds $21.00 regardless of how low the |
| huge profit to trading firms due to excessive trading | | | | stock price dropped. A Sell Stop Limit works in the |
| and low maintenance. | | | | opposite fashion. If you owned AMD and it was |
| It's very simple how it works. You can sign for a | | | | currently trading at $20 and you wanted to sell it if it |
| brokerage account at a variety of places; the most | | | | were to hit $19 but you don't want to sell it if it goes |
| popular being Scottrade, Ameritrade, and ETrade, but | | | | below $18 before it's filled then you would set your |
| there are many out there that offer better savings. | | | | Stop Price to $19 and your Limit Price to $18. |
| Once signed up, you can begin purchasing and selling | | | | Put and Call Options |
| stock almost instantaneously. | | | | There is a way to participate in the stock market |
| The Stock Symbol | | | | without ever actually purchasing stock in a company. |
| Each company before being listed on the New York | | | | It's very similar to making predictions on which way |
| Stock Exchange or other exchange will have a | | | | you think the stock price of a company is going to |
| dedicated symbol (usually up to 4 characters on the | | | | go and then betting money on it. These are called |
| NYSE). For example, Walmart is known as WMT, | | | | options and it is a technique used by mainly |
| Target is known as TGT, and Ford is known as just | | | | professional investors to make money in the stock |
| F. You can lookup symbols through Google or yahoo | | | | market regardless of whether it is going up or down. |
| or even using your online brokerage account, but you | | | | For every bet that is made there is a bet against it |
| will need the symbol before you can make a | | | | and using these two opposing bets a contract is |
| purchase. Please be careful that you do not | | | | formed between the buyer and the seller. A contract |
| transpose or mistype a character because you may | | | | is usually considered 100 shares. |
| accidentally end up with the wrong stock. | | | | Put Options |
| Buying and Selling - Limits, Stops, and Stop Limit | | | | A Put Option allows the purchaser of this contract to |
| Orders | | | | sell a commodity at a pre-set price agreed upon in |
| When you go to buy or sell a stock you have | | | | the contract. The contract usually expires within 30 |
| several options that you can put in place to protect | | | | days and it doesn't have to be exercised. For |
| yourself against immediate losses and if used | | | | example, if Bob thinks Google (GOOG) is going to |
| improperly can reduce your capital gains. | | | | plummet after their next earnings report from $400 |
| Market Price | | | | to $300 then Bob may wish to use a Put Option and |
| Generally speaking if you don't use any of the | | | | find a contract that allows him to sell Google(GOOG) |
| options than you would buy or sell the stock ar | | | | at $400 anytime within the next 30 days or |
| market price. This means that whatever the going | | | | whatever time frame is necessary for this prediction. |
| rate or quote is for that stock at the time of | | | | Bob buys 5 contracts (500 shares) paying a $20 |
| transaction is what you will receive. | | | | premium per share for the contract ($10,000 total) |
| Stop Order (Stop Loss) | | | | and Google does indeed drop but only to $350. Bob |
| A Stop Order is where you will set a certain amount. | | | | could now exercise his option and sell his 5 contracts |
| In buying for example, let's say you wanted to pay | | | | which will give him (500 shares * $400) minus (500 |
| 30 dollars for Walmart (WMT) stock but no more. | | | | shares * $350) minus the $10,000 he spent on the |
| Let's also say that Walmart is currently trading at 28 | | | | contract. This would give him a ($200,000 - $175,000 |
| dollars at the session open but is rising in value due to | | | | - $10,000) $15,000 capital gain from this transaction. |
| a good earnings report but you don't want to | | | | Let's say Google (GOOG) went up instead to $450. |
| purchase the stock until it hits 30 dollars to make | | | | Bob is not required to exercise his transaction |
| sure that is' really going to rise. By placing a Buy Stop | | | | because it would result in a loss and the $10,000 he |
| Order of 30 dollars your online brokerage account will | | | | spent on the contract is non-refundable. |
| wait for the stock price to hit 30 dollars and then | | | | Call Options |
| turn into a market order where it will try to purchase | | | | Call Options work the opposite way of Put Options. |
| the stock at market value. Now let's say that you | | | | Taking the same scenario above let's say that Bob |
| own Walmart and you paid 30 dollars for it but you | | | | thinks google will go up to $500 after the earnings |
| don't want to lose a lot of money so you place a Sell | | | | report is released from $400. Bob uses a Call Option |
| Stop Order of 29 dollars. Your transaction will not | | | | and buys 5 contracts (500 shares) of Google paying |
| become active until Walmart reaches 29 dollars at | | | | a premium of $20 per share ($10,000). The earnings |
| some point during the day. Once it reaches 29 dollars | | | | report is released and Google increases to $550. Bob |
| your order becomes a regular market order and it will | | | | has the right to purchase 500 shares of Google at |
| make it's best attempt to fill your order at market | | | | $400 from the writer of the contract and can now |
| price. | | | | resell them at $550 if he exercises his option. So Bob |
| Limit Order | | | | gets ($550 * 500) - ($400 * 500) - ($10,000 |
| With a Limit Order you will set maximum and | | | | premium) $65,000 from exercising his option. If |
| minimum prices you are willing to buy and sell at. | | | | Google were to drop instead of increase then Bob |
| When placing a Buy Limit Order on a company what | | | | has the right not to exercise his option and he would |
| you are saying is that I want to buy this stock as | | | | then forfeit his $10,000 on the expiration date of the |
| long as it as less than this amount. For example, if I | | | | contract. |
| put in a Buy Limit Order on Vonage (VG) for 10 | | | | Trading on Margin |
| dollars and the stock is currently trading at 7 dollars | | | | Trading on margin is an excellent way to amplify your |
| then it will continuously try to buy Vonage stock until | | | | gains when you make the right picks but it is also an |
| it surpasses the 10 dollar mark. When placing a Sell | | | | excellent way to amplify the losses as well. Most |
| Limit Order you are saying that I want to sell my | | | | brokerage firms allow you to buy on margin of up to |
| stock but I am not willing to sell it for any price under | | | | 50%. That means you could purchase $20,000 of a |
| my limit. For example, if you currently own Vonage | | | | stock only using $10,000 of your own money and |
| and it's trading at 7 dollars and you decide that you | | | | borrowing the other $10,000. It's a really good way |
| want to sell it but for no less than 6 dollars than you | | | | to capitalize on short term investments but has |
| would place a Sell Limit Order with a target price of 6 | | | | never been recommended for long-term holdings |
| dollars. The brokerage services would continually try | | | | because the $10,000 you borrowed usually comes |
| to fill your order up until the point when Vonage | | | | with an APR of around 10% that you pay each |
| drops below 6 dollars. | | | | month from your account. Also, incase of a sudden |
| Stop Limit Order | | | | market crash, most brokerage services require you |
| This is a combination of both a Stop Order and a | | | | to keep at least 30% and sometimes even 50% |
| Limit Order. When buying you will be able to set two | | | | Current Market Value in your account. |
| prices, which have to be set above the current | | | | Therefore, if you purchase stock for $20,000 using |
| trading price. For example, let's say that Advanced | | | | $10,000 of your own and $10,000 borrowed than |
| Micro Devices (AMD) is currently trading at 20 dollars | | | | you must maintain 30% of the $20,000 at all times |
| a share. You would like to buy them but not until | | | | which is $6,000 of your own money in the account. |
| they reach a price of $20.50 and you aren't willing to | | | | Keep in mind that the money you borrow will never |
| pay more than $21.00. You would then set your Stop | | | | change so if that $20,000 in stock lost 20% of it's |
| price to $20.50 and your Limit Price to $21.00. The | | | | value then you would have ($20,000 * .8) $16,000 in |
| brokerage service would then try to fill your order | | | | stock left; $6,000 which is of your own money and |
| once the $20.50 mark has been reached up until the | | | | $10,000 which is still the lenders money. If the stock |
| point when it hits $21.00. If the price goes over | | | | fell anymore than that they are allowed to sell your |
| $21.00 then your order will not be filled until it drops | | | | shares unless you add more cash to the account. |
| back below $21.00 for whatever time frame you | | | | |