5 Simple Tips for Successful Stock Trading

by Richard Band | June 12, 2013 12:07 pm

5 Simple Tips for Successful Stock Trading

Diving into the market can be overwhelming on multiple levels. Besides deciding to invest, there’s the question of how much to invest, what to invest in, how to do it, when to do it and … well … you get the point.

youngInvestorsB.png 5 Simple Tips for Successful Stock Trading[1]While many young investors will likely opt for a company-wide 401k plan[2], opening a brokerage account is another option. And whether you do business at TD Waterhouse, eTrade or some other brokerage[3], you can save money with every trade if you know the ropes.

See, savvy trading is just a matter of squeezing out an eighth here and a quarter there until your nickels and dimes add up to thousands and then tens of thousands of dollars over an investing lifetime.

This is especially true for those with a smaller pile of funds to invest, as each nickel and dime is a larger piece of your pie. And even if you’re looking to get into buy-and-hold investments, these tips and techniques I’ve picked up from my 30-plus years of dealing with stockbrokers can still help.

Take a look:

1. Never place market orders (those with no specified buy or sell price) before the opening of the trading day.

Strange things can happen at the opening bell, so you may find yourself paying much more than you intended on the buy side, or you may receive far less than you expected on the sell side. This is always a risk with a market order[4], but it’s most acute at the opening, when orders tend to pile up from traders reacting to last night’s (or this morning’s) news. If you must trade at the opening, protect yourself with a limit order[5].

2. The best time to trade “at the market” is usually in the afternoon, from about 1 to 2:30 p.m. EST.

By then, the whole country is at work, including the West Coast, and everyone has had a chance to digest the day’s important news. Market-shaking government statistics are almost always released in the morning. So are most corporate earnings reports[6].

3. Always check the “bid size” and the “ask size” for any exchange-listed stock before entering a buy or sell order.

A good real-time quote system will tell you not only the last price of a stock, but also the bid price[7], the ask price[8] and the number of shares being bid for or offered at those prices. When the bid size is larger than the ask, it’s a sign of underlying demand for the stock , so don’t hold out much longer if you were planning to buy. By the same token, a large position on the ask side implies there are lots of sellers eager to get out. Don’t shilly-shally if you were intending to sell.

What if the bid and ask sizes are almost equal? That’s a perfect situation for entering a limit order exactly halfway between the bid price and the ask price. Chances are, your order will be executed right there in the middle.

4. The best time of the month to buy stocks is around the 18th through the 22nd.

That’s when cash flows into the market (from pension funds and dividend reinvestment) tend to be at their low ebb, along with prices. The best time of the month to sell is during the first two and last two days. Also, you should be an aggressive buyer during the months of September and October, when the market has a strong seasonal tendency to bottom. Plan to do most of your selling in April and early in May.

5. For the most part, choose stocks to buy that are trading above $10 a share.

There are two reasons for this advice: (1) Stocks below $10 are usually quoted at larger percentage spreads between bid and ask (the buying and selling prices), so you need a bigger price increase to break even; and (2) companies with low-priced stocks are more prone to financial trouble, including bankruptcy.

I make an exception for closed-end funds, some of which may trade below $10 because management wants the share price to seem affordable to small investors. As a rule, though, most sub-$10 stocks have the odds stacked against them. Buy 50 shares of a $20 stock rather than 200 shares of a $5 stock.

Like what you see? Sign up for our Young Investors e-letter[9] and get practical investing advice delivered to your inbox every week!

Endnotes:
  1. [Image]: http://investorplace.com/hot-topics/young-investors-series/
  2. company-wide 401k plan: http://investorplace.com/2013/04/intimidated-by-your-new-401k-try-a-target-date-fund/
  3. or some other brokerage: http://investorplace.com/2013/02/so-ive-decided-to-invest-now-what/
  4. market order: http://www.investopedia.com/terms/m/marketorder.asp
  5. limit order: http://www.investopedia.com/terms/l/limitorder.asp
  6. corporate earnings reports: http://investorplace.com/2013/03/3-red-flags-young-investors-should-watch-for/
  7. bid price: http://www.investopedia.com/terms/b/bidprice.asp
  8. ask price: http://www.investopedia.com/terms/a/ask.asp
  9. Sign up for our Young Investors e-letter: https://order.investorplace.com/index.jsp?sid=QL8104

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