Step 8: Trade!
For stocks that you decided were worth buying in step 7, it's time to move forward, provided that:
- this stock makes sense given your specific situation (risk tolerance, timeline, overall portfolio).
- you understand this company's business substantially better than the average investor.
- you are confident that the stock's price is well below its value.
- you buying for the right reasons (rational investment decision rather than greed or fear).
Decide whether to get equity or options.
In most cases you will probably buy equity, but you may want to consider options instead. With equity you actually own a fraction of the company because you own a share, but with an option you have the right, but not the obligation, to buy a fraction of the company in the future. Nearly all brokers who handle equity trades can also handle options trades. There are advantages and disadvantages to this approach, and we encourage you to learn and understand options before considering them.
Decide how much to buy.
What is the worst-case scenario, and are you prepared for it if it happens? Will you be able to stomach it if you lose your entire investment?
Decide where to buy it.
If you don't already have an account at broker, here are some leading brokers you might want to consider.
Factor in tax considerations.
In Step 1 we suggested considering tax consequences when deciding your overall investment, since different types of investment gains (and losses) are taxed differently. If you have a tax-advantaged account such as a 401(k), IRA or Roth IRA, one investment may be better off inside such an account than another., and it's important to factor this in to your overall investment strategy. You may find the site below useful, or you may want to talk to a tax professional.
Decide what kind of buy order to place.
Even if you've decided what stock you want and how many shares you want to buy, you still need to decide what type of buy order to place. Here are some of the more popular types:
Market Order: You tell your broker to purchase or sell a specified quantity of stock at the prevailing market price.
Limit Order: You tell your broker to buy a security at or below a specified price, or to sell a security at or above a specified price. This ensures that you will never pay more for the stock than whatever price you set as your limit.
Stop Order: You tell your broker to buy a security at the market price once it reaches a level higher than the current market price. (The opposite would be true if you were selling: you would tell your broker to sell your security once it reaches a level below the current market price.)
Fill or Kill: You tell your broker to execute the trade immediately; if the trade is not filled right away then your broker does not execute the order.
Day Order: You tell your broker to execute the trade by the end of the day; otherwise, he or she does not fill the order.
Also, be sure that you have enough cash in your account to cover the cost of the trade (unless you plan to buy on margin, which we don't recommend).