Making Your First Purchase

Now we have all the tools we need to research a company and decide to make a purchase.  So let's do it-let's buy our first stock.  Grab a cold beverage, this material isn't the most entertaining.

In the old days, whatever those are, we would likely have a full-service broker that we would call up on a payphone, relay our order, and pay a relatively high commission to complete our order.  Progress has provided us with online brokerages, which put us in full control of our portfolios and typically cost less per trade (typically on the order of $7 - $10) than the full-service brokers.

Examples of online brokerages include E*TRADE, Scottrade, Fidelity, and TDAmeritrade, among many others.  Kiplinger, a personal finance magazine, has assembled a list of its top 10 online brokerages, which can be a good starting place to research and compare multiple options.  It is difficult to go wrong with any of the well-known brokerages.  Keep in mind, if you plan on trading frequently, slightly higher fees can add up over the long term.

Typically, the brokerages will require you to deposit some minimum amount into the account to open it.  Novice investors may want to stay close to the minimum until they feel comfortable with independently managing a portfolio.  To run a portfolio in the manner that I will explain in an upcoming 101 post, a minimum initial account value of $10,000 is an appropriate amount.  Just remember, never invest more than you are willing to lose.  There is no guarantee that you will make money.  Assume that the money you start out with may be the cost you pay to learn how to manage a portfolio, so any money that you lose can be considered an educational expense (no, not in the IRS's eyes).

After you fund your account, you should check for any webinars that you can use to familiarize yourself with your brokerage's "trading platform."  When you are ready to purchase a position, you can usually find a button for "buy," "sell," and/or "trade."  After selecting one of these buttons, a screen with a lot of trading options will likely pop up and sour you on the whole process.  Good thing for you, Common Cents has got your back on this one.

For starters, you need to be aware of the ticker symbol for the company you are interested in purchasing (i.e., LUV is the ticker symbol for Southwest Airlines), the price you would like to make your purchase, and the number of shares you want at that price.  Your total purchase cost will be determined by the number of shares you want to buy multiplied by the share price at which you want to purchase the shares.  So, if I want to buy 20 shares of LUV at $37.50, my total purchase cost will by 20 x $37.5 = $750.  And make sure you have enough available funds to cover the cost!

Easy enough, until you get to the order type.  Market, limit, stop loss, trailing stop loss, etc. etc. etc.  What does all this mean?  There are really only two order types we need to be concerned with: market and limit.  A market order is an order to buy shares at whatever price the stock is at when you are done inputting your order.  You may want LUV at $37.5, bust as you start to put in your order, it quickly increases to $38.00.  In this case, you would wind up purchasing your shares for $38, $0.50 higher than you intended to.  That blows.  That order type seems risky, right?  That's why limit orders are the only orders that Common Cents uses.

Why use limit orders?  When you select this option, you can input the maximum price you want to buy at or the minimum price you want to sell at.  So if I put in a limit order for LUV shares at $37.5, and it immediately pops up to $38, my purchase order will not be completed.  When selecting a limit order, we must define when we want our order to expire.  The following defines a few of the order durations:

Day - This order type will expire at the end of the trading day if it is not filled.  If it is filled during the day, the order will be completed and deactivated.

Good Until Cancelled - This order type will continue, yes you guessed it, until it is filled or cancelled.  That could be 1 second, 1 minute, 3 days, months, or years.  Exercise caution when using a long-dated order, as an extended duration can cause you to make purchases that are no longer advisable when they are executed.  For instance,  LUV may be a good buy today, but next week news may come out that makes LUV a terrible buy.  If you have an order duration that extends past a week, your order may be filled on a sharp share price decline due to the news, and you may be inadvertently stuck with a stock that you are no longer interested in purchasing.

Fill or Kill - This type of order will be immediately filled or immediately cancelled.  Not a bad idea, but this type does not allow you to put in a buy order for a lower price if you cannot watch the price of the stock all day.  If LUV is at $38, and I want to purchase it for $37.5, I can put in a limit day order for $37.5 and go on with the rest of my day.  If it gets down to this level, bingo! I got my stock.  If not, oh well, I'll try again when it gets to my price.  Conversely, a Fill or Kill limit order at $37.5 would automatically cancel in the previous example, because LUV was at $38 and, therefore, was above my maximum specified purchase price.

When using the Day and Good Until Cancelled orders, you can typically define the specific time or date/time that the order expires.  But for most cases, a limit day order that expires at the end of the trading day is usually the easiest and safest order to use.

Common Cents Take: Open an online brokerage.  Fund it with the minimum amount if you have a low risk tolerance, or a minimum of $10,000 if you are willing to "pay for your education" with losses as you go.  When you decide to purchase a stock, do so with a day limit order, which expires at the end of the day.  Easy enough.

Don't you dare pull that trigger yet!  We need a buying strategy before we start throwing money all over the place.  And for that, we need some guidance on how we want to run our portfolio as a whole.  Yep, that's next!