by Arlene Hauben

Created on: August 03, 2010

Online trading has been a boon for individual investors who prefer doing their own research and trading stock on their own.  Before online trading was invented in the 1990s, investors paid hundreds of dollars in transaction commissions to registered stock brokers.

Online trading is available to anyone with the cash to open an account, usually a minimum of $2,000. A single trade costs between $4 to $7.95, each time a buy order or sell order is placed. The trick is to pick stocks with great care (do your research), avoid risky situations, and make a profit. Surely, this is possible, but not magic by any means.

While day trading can be risky, frequent trading in and out of a few good stocks can be more manageable. Some investors supplement their incomes by trading stocks, but there is always risk. Don’t kid yourself into thinking you can’t lose.

Investors think, “I just have to buy a stock and wait until it goes up and then sell it. When it goes down, I can buy it back”

There are several things that can go wrong with that scenario:

The stock might be affected by an overall decline in the market or in a sector and slide down. For example, Cisco Systems (CSCO) was trading at $65 a share about 10 years ago towards the end of the technology boom. An investor that bought 100 shares at $65 soon watched the stock go down and it never hit $65 again. Today, CSCO never went back up and has been selling in the $19-high $20 dollar range. So although a stock like CSCO seemed like a sure thing, it was not.

The company can be impacted by bad news, such as the recent financial crisis, the oil spill, or a natural disaster, and its stock price could go down drastically.

The company could turn out to be a house of cards – like Enron.

An industry sector, such as shipping or copper, could be flying high and then lose momentum for no apparent reason. If you are not watching the movement, you might fail to get out in time.

A new invention or development might impact a company’s product. This has happened frequently in the technology sector.  

Smart traders look for the most liquid and most volatile stocks. They also look for stocks that trade in a narrow range and consistently trade within that range (known as range trading) for an extended period of time.

For example, Citicorp has been trading between approximately $3.50 and $5.00. The trader tries to buy at the lowest point by tracking the stock and using limit orders. If he owns 1000

• 1
• 2
• Next Page >>