Stock trading terms

Stock trading terms can be a little confusing.
Orders
Limit orders
A limit order is the safest and most basic kind of order. It is a request to buy or sell shares of stock at a certain price.
Examples:
* Limit sell: I want to sell all my shares of MSFT, but only if I can get at least $30 per share.
* Limit buy: I want to buy 10 shares of GOOG, but only if I can get them for at most $100 per share.
A limit order can be either a day order or good-till-cancelled. It can also be an all-or-nothing order if you are not willing to accept partial fulfillment. It is the stockbroker's matching up of limit buy orders and limit sell orders that sets the price of the stock on the market.
Market orders
This is the most common kind of order. It is a request to buy or sell stock at whatever price it will fetch "at the market." Since market orders are effective regardless of price, they have no effect at stabilizing the price of the stock. When the ratio of market orders to close-to-the-market-price limit orders is too high, excessive volatility in the stock market will result, because relatively few participants in the market are actively setting prices at which they are willing to buy or sell. They are just following the crowd, and if the liquidity or volume of trades on a certain stock is not sufficient, a trader may get a very unpleasant surprise when the "market" order is executed. Market orders are usually just day orders. It wouldn't make very much sense to make a market order good-till-cancelled. It would be much smarter to set a reasonable limit price if there is not enough liquidity in the market to execute your order immediately. Market orders usually always go through, and are fulfilled completely. Examples:
* Market sell: Let's sell it all and just get what we can for it today on the market.
* Market buy: Let's buy X shares of stock now no matter how much we have to pay.
If you are not comfortable with this type of order, then you should set a limit price.
Stop loss orders
This is the riskiest kind of order, which can lead to the most extreme volatility on the market. It is the reverse of the limit order. It is a panic order, for example:
* Stop loss sell: If GOOG ever trades under $99 per share, I want to sell immediately before it tanks!!!
A stop loss sell order is usually good-till-cancelled, and it becomes a market order as soon as the stock trades at or below the stop price. There might even be:
* Stop loss buy: If GOOG ever hits $150 per share, buy, buy, buy and get on the bandwagon before it goes any higher!!!
Investment strategies
Diversification
Don't buy or own stock in just one company, especially the same company where you work. It would be a doubly disastrous if you lost your job and your retirement account tanked at the same time, because a single company fell on hard times. Diversification means owning a variety of stocks in various industries and other assets. You might be glad you owned some real estate if the stock market as a whole tanked. There are even mutual funds that invest in real estate. Foreign markets may do well even if the domestic economy tanks. Or you might want to own bonds or shares in a money market fund, if you are a conservative investor, or you are near retirement and you anticipate needing your money soon. Dollar-cost averaging will help you diversify across time as well as space. Time diversification means getting into the market gradually, and pulling out of the market gradually as you near retirement. This will protect you against sudden swings in the market.
Buy-and-hold
Buy stock in stable companies, (either small-to medium companies or "blue chips",) and just keep it forever and enjoy the dividends. In the US, corporate income is taxed at some 35%, and the dividends are taxed again at your personal tax bracket. However, capital gains tax is deferred for as long as you own the stock, and if you pass it on to your children, the tax basis may even be readjusted. Buy-and-hold is a low-stress, low-maintenance investment strategy.
Value investing
Look for bargains on the stock market, i.e. companies with good financials—nose in the books, you CPAs—which are trading below what you feel is their true value. A value investor will typically have several outstanding good-till-cancelled limit buy orders in the hopes of picking up a bargain here or there. A true value investor will sell stock that becomes overpriced (thereby incurring tax for short-term capital gains,) but there is always the option of holding on to it like a buy-and-hold investor. There is nothing immoral about value investing. If you do your homework and find bargain somewhere, it's yours fair and square.
Growth investing
Look for "hot" stocks, or the next big thing. Did you hear that XYZ is coming out with a new drug, and it just passed FDA tests? Growth investing can be very lucrative, but nerve-racking. There is nothing immoral about growth investing, either, unless you have access to actual inside information.
Mutual funds
You don't have to do it yourself. There are innumerable mutual funds that will follow all these (and more) investment strategies for you, but be aware that mutual funds have ongoing management fees as well as possibly a "load" or commission when you buy or sell. Mutual funds have the advantage of being able to diversify much more broadly than you can on your own, unless you are extremely wealthy and have a great deal of time to devote to researching and picking stocks. But by all means, if you are interested in a particular company, buy a few shares of stock and read the literature that comes in the mail.
Dollar-cost averaging
This is a strategy that can be used with any of the above. Just invest regularly a fixed amount every month, rather than a fixed number of shares. This way you will buy more shares when the market is down, and fewer shares when the market is up. (It's just part of buying low and selling high, like all investment strategies.)
Specific share accounting
Specific share accounting comes into play when you want to sell some but not all of your stock in a particular company. Suppose you have been investing regularly for some time, and you have paid various prices at various times for this stock. If you decide to sell some shares without keeping track, the Internal Revenue Service will assume a FIFO accounting for the shares that you sell, which is likely to be disadvantageous from a tax point of view. However, if you and your broker both keep track of specific shares, you can sell stock that you acquired more recently at a higher price, while continuing to defer the capital gains from the stock you acquired earlier at a lower tax basis. The only caution is to avoid selling those shares acquired so recently that they would incur short-term capital gains tax.
Options
They're too complicated, you have to exercise them, and they don't pay dividends.

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