Before you ever try and actually invest real money in stocks, I would STRONGLY RECOMMEND that you practice researching, tracking, and picking stocks for at least 6 months to a year, without actually buying any stocks. Most Online trading accounts have a way for you to set up a portfolio without actually having to buy the stock. This way you get to learn about the online system, the research tools, and how to actually manage your portfolio without losing any money. I wish someone would have told me about that.
If you have never dealt with Stocks before, there are some general things that you need to know. Everything is important, so I’m not going to try and list these in any order. Many people do not realize that any corporation has stocks or shares. Corporations are owned by the Share Holders. Each share is a fractional ownership of the company. The fractions can get very very small. If there are 1,000,000 shares and you own one of them, you own 1/1,000,000th of the company. So don’t get too excited about the ownership thing.
In Canada there are two types of corporations. “Private” and “Public“. You can not buy shares in a Private corporation unless you are “within Arms Length” of the corporation. It means that you have to have some relationship with the company. For example, you are an employee, a supplier, daughter of the president etc. Private Company stock is not listed on Stock Exchanges. Public Company stocks are listed on stock exchanges. Anybody can buy Public Company Stock. From here on out we will be only talking about Public Company Stock.
Note: this is a rework of an article from my old website. The information is valid but the stocks used as illustrations may not be. Bioniche is a good example of one that is no longer around.
The most important thing about stock trading is knowing what the headings on a stock page mean. All stocks have a “Stock Symbol”. This can be anywhere from one to several characters long. On Canadian Exchanges most of the Symbols are from 1 to 3 characters. There are starting to be more Canadian stocks with 4 letters. Canadians can get away with fewer characters, because we have fewer stocks listed on our exchanges. In the US, symbols for companies listed on the main exchanges have up to 4 characters, and on the lesser exchanges there are up to 5 characters. The symbols help to save space and time. Whenever you want information on a stock, most applications use the Symbol not the whole name of the company.
Listed Stocks/Shares have no set value. When a company starts out, the shares have a fixed price. This price is roughly equal to the value of the ASSETS, minus the LIABILITIES, divided by the number of issued shares. This is often called the “Book Value”. Investors use this measurement to get a rough judgment of the value of a share. If the Book value of the company is $1,000,000.00 and there are 1,000,000 shares issued then the value of a share should be $1.00. This only hold true until they are released to the market. Then all bets are off.
In reality, Book Value is only one of the factors involved with the actual selling price of a stock. The biggest one is the “MARKET’s” PERCEPTION of the value. Simply stated, if the Book Value is $1.00/share but the “MARKET” thinks this company is going to grow and make a big profit, the actual selling price of the stock might be $2.00. The same holds true if the Book Value is $1.00 but the “MARKET” thinks that a new competitor will cut into the company’s profit, then the selling price of the stock might be only 50 cents. PERCEPTION often plays a bigger part in the value of a stock than it should. That is why Listed Stocks/Shares have no set value.
Since shares/stocks have no set value, the buying and selling price is established by auction. When I compared the real Stock Exchanges to the Auction Houses of many online games, they function the same way. That is why the Stock prices are displayed with a “BID” and an “ASK” heading. The BID is the price that someone is willing to buy the stock at, and the ASK is the price that someone is willing to sell a stock at. Please note; only the Highest BID price is displayed, and the Lowest ASK price is displayed.
Since the trading of stocks is done by auction, just because you want to sell your stock at $1.00 today does not mean that you will find someone who is willing to pay $1.00 today. So don’t be upset if it takes you a few days to either buy or sell a Stock at your price. Also note that prices can and do fluctuate thought out the day. This is important to know if you don’t have access to price info, or trading ability, all day.
Stocks are sold in “BOARD LOTS”. Often the first surprise for the new investor is that you do not buy and sell stocks using random quantities. A BOARD LOT is a set number of shares that the exchange likes to deal in. They like round numbers. On most exchanges the standard BOARD LOT is 100 shares. Board lot sizes can vary from exchange to exchange, and do change with the actual share price. If the shares are less than a dollar then the board lot may be 500 or even 1000 shares. Knowing how big a board lot is, is important; because when you are looking at a Stock quote the “Bid Size” and “Ask Size are stated in Board Lots. ie. If the Bid Size is 50 for a $5.00 stock then there are actually 5000 shares being looked for. If the Bid size is 50 for a $0.09 stock then there are actually 50,000 shares being looked for.
If you want a number of shares that is not a “Board Lot” then that would be considered an “ODD LOT” Brokers do not like to deal in ODD LOTS. They can, but might not. Brokerages are allowed to charge a premium on each share of an ODD LOT. This often depends of he volume of those shares. Each exchange has set rules about BOARD LOTS and ODD LOTS. If you were to buy an odd lot you might be charged a penalty. There are posted penalties on each exchange, (nobody really wants to talk about them) but my broker told me, that the penalties are at the discretion of the broker, and seldom applied to actively traded stocks. This was a bigger issue in the days before computers.
What this means is; if you want to buy RIM (Research In Motion) shares you would realistically have to buy a board lot of 100 shares. At today’s closing price of $17.51 you would have to pay $1,715.00 for the shares plus the buying brokerage commission. You could buy only 50 shares (an odd lot) and probably be ok, because RIM is an active stock. If your buying or selling, XMC (Xceed Mortgage Corporation) there might be a penalty because they are not as active a stock.
There are more things to consider, and we will cover them in other pages.