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Buying a Stock
(Part I)
by WealthEffect Staff

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Stocks are bought and sold on the New York Stock Exchange or in the Over-The-Counter Market
 
  There are spreads and commissions to be paid when you trade  
  The less trading you do, the fewer costs you will pay  
 
1.

Stocks will trade at any given time at whatever price buyers and sellers agree upon. To set a price, buyers and sellers need a place to trade. That place can be a stock exchange, which is an actual location where specialists coordinate the trading. The largest and best known of the exchanges is the New York Stock Exchange (NYSE).

Stocks can also be bought and sold in the Over-The-Counter (OTC) Market, in which market makers in various locations coordinate the trading. The prices of the best known OTC stocks are quoted by the National Association of Securities Dealers — the system of quotes is known as NASDAQ.

 
 
2.

The specialists and the market makers are the middle men between buyers and sellers. If you want to sell a stock, you sell your shares to a specialist or market maker at the bid price; if you want to buy, you pay the offer price — the difference between these two prices is the spread, which is the middle man's profit.

For example, a stock might be selling at 50 which means that the last trade was executed at $50 per share. The shares are currently bid at 48 ¾ and offered at 50 ¼. If you wanted to sell 100 shares, you would receive $4875 minus the commission for your broker; if you wanted to buy 100 shares, you would pay $5025 plus commission. As you can see, whether you buy or sell, you are making money for both the middle man and the stock broker.

 
 
3.

Since you are paying two costs every time you buy or sell — whether or not you end up with a profit or loss — you have a strong incentive not to trade. Although these costs seem small each time, they will add up. Specialists and market makers and brokers become rich over time accumulating the flow of itty bitty sums paid over by you and many others.

As described later, The Wealth-Effect Strategy does not rely on active buying and selling of stocks. On the contrary, it will keep your payments to a minimum.

 
 


Buying a Stock
(Part II)

 
 

Limit Day Orders are recommended
 
  Use discount brokers  
  Don't listen to unsolicited advice  
 
1.

When you want to buy shares of stock, you first want to "get a quote": Your broker can tell you the price of the last trade and the current ask price. If you wish to place a trade, you should put in a limit order at the ask price — your trade will be executed at that price or better. (If you are a seller, place a limit order at the bid price.)

You should also request that your order is only "good for the day" — this means that, if your order is not executed during that day, it will be cancelled. If that happens, you can simply re-enter your order the following day.

 
 
2.

There are different types of brokers who will place your order and charge you a commission. Retail brokers, also known as full-service brokers, will charge the most but they will also give you advice. Discount brokers, who don't give advice, will charge less; these brokers can handle your trade over the phone or, even less expensively, over the Internet.

As a general rule, you should try to avoid advice. Wall Street is focused on the short-term. Such speculation is inconsistent with investing in the stock market. To make matters worse, those who give advice in return for commissions might be more than tempted to sell you ideas with the fattest commissions, even if they're not in your best interest.

A new opportunity has appeared for investors who use the Internet. Major brokerage firms, such as Merrill Lynch, DLJ, Paine Webber, Morgan Stanley and S.G. Cowen, are now making their research reports available to individuals. In a sense, this is the best of both worlds: research without advice! Yes, the research will recommend which stocks to buy, but this type of advice is easily ignored.

 
 
3.

DO NOT let yourself be tempted, tormented or tricked by any stranger calling you with any "investment opportunity". Just hang up. It's unfortunate to recommend impoliteness but these people will feed on your decency and your vulnerability.

Suggestion: Go to Why a Stock Market?