Buying stocks

Buying stocks — But First, Before We Start

Buying stocks
With an online brokerage account opened, buying stocks and selling stocks online is a simple process involving a number of pertinent entries to the online order form that your new broker can explain when setting up an account. It’s a “mechanical” entry process that becomes more familiar with use when buying or selling stocks with some frequency — after the initial period of hesitation and uncertainty in specifying symbols, prices, quantities and conditions relating to the stock of choice.

For some brief general introductory comments on buying stocks and a little background on the Stock Market, Wall Street, and Stock Exchanges, please check out our earlier post Objectives and scroll down to “First Things” part way down that first page.

Before the stock purchase
Placing the order is the easy part, but there’s a lot of work to be done before that can happen and a lot goes into finding and qualifying stock candidates to trade first. It’s the more creative process of picking stocks and then the steps to follow to trade them that this stock market basics guide is mainly concerned with.

To begin to gain an understanding of the market we should probably begin to use some of the jargon of the market, often called Wall Street, or just “the Street”, (to name the first two) — so let us do so as we introduce at random some of the basic background information we need to know at the beginning of our stock market basics experience.


First, we need to know the trend
To trade successfully it is necessary to acquire an understanding of how the market works and to interpret changes that constantly occur. So let us start with the need to know how the  market is currently performing and what is the trend, since we follow the guideline “Don’t trade against the trend.”

Most successful traders are students of the stock market and know how to interpret the meaningful changes that take place as the trading day progresses and the prices, volumes, and averages trend in response to the pressures of supply and demand.

The trend
The trend, once established, is background information of longer term and we will watch for changes that normally take quite a while to develop. To find the trend right now, we can check out a chart of the any or all of the market indexes, the DOW Jones, the Nasdaq, or the S&P 500, covering the period since the last major trend change.

Here for instance is a weekly line chart of the S&P 500 for that period, it shows the market has been mainly up trending since March of 2009 (with an intermediate interruption starting March 2010) — click on the chart to enlarge it slightly for a sharper view:

S&P Long term weekly

To bring us more up-to-date, the shorter period daily chart of the last 4 months shown below, shows that a change in trend started about 17 February of 2011 at around 1340 (the values on the right vertical side and which for now we will call a resistance level) and continued down to about 1260, a possible new support level, and then has reversed slightly for the last 2 trading days. We will discuss Support and Resistance more fully later, in a separate post.

Buying stocks

S&P 500 Shor term

So now we know the general trend, up mainly for quite a long time now, since the previous mini retreat ending around late June of 2010, that’s about 7 plus months (we will keep that in mind and maybe the next “leg of the uptrend, if it occurs, will be of equal length, it’s just a possibility, but patterns tend to repeat themselves and that is a basis for a lot of interpretation and forecasting — that patterns repeat themselves ).

The recent change in trend, short as it is, to date has not been resolved as yet by the last 2 days of reversal, so for now, being cautious and to minimize risk, we don’t trade long against the current downtrend so we will stand on the sidelines and observe.

But if we currently hold stocks we should follow our established guidelines (to discuss again later for newcomers to this site) that  require us to exit a position if the market falls to given point. See our recent post: Know When to Sell.

Market Summary Index Prices and short term market performance
Next we’ll deal with the short term market performance summarized by the closing values for the main indexes, the Dow, the Nasdaq, and the S&P. You can find them on the MARKET SUMMARY box on the at top left — or they are given on CNBC television at the running head at the top of the screen as they change moment to moment throughout the trading day. There are several other indices that we could discuss later elsewhere on Stock Market Basics, but the 3 mentioned here are the main ones referred to so that’s enough for starters. Here are the closing values for yesterday, Friday March 18, 2011.


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