Once you identify a stock you want to own, the obvious next step is to buy it -- a transaction that, for U.S. stocks, will most likely take place on one of the three big public exchanges. About 3,000 stocks trade mainly on the New York Stock Exchange; another 900 or so on the American Stock Exchange; and perhaps 5,400 on the Nasdaq, a computer-based trading system that links together many of the nation's brokerages.

While the details of the exchanges differ, they share this in common: all are based on the auction system of trading. That means that for any stock, there is a bid price (the price that prospective buyers are willing to pay) and an ask price (the price that owners are demanding to sell). These prices move based on the balance between buyers and sellers. If buyers want more shares than sellers are offering, both bid and ask go up; if the opposite is true, they fall.

For widely traded stocks, the so-called spread between the bid and ask prices is sometimes as thin as 1/64th of $1 per share (or 1.5625¢) and is seldom larger than 25¢ per share. But for thinly traded stocks, the spread may be much larger -- which is a point worth remembering. The reason: the spread is, in effect, a cost of trading. Moreover, it's a hidden cost -- since you're not likely to see it listed anywhere on a brokerage statement. But if you bought the stock at the ask price and turned around and sold it immediately at the bid price, you would lose money on the trade even before any commissions or fees were included. Such expenses can be significant, as we'll explain below.

Ordinarily when you want to buy or sell a stock, you need to work through a broker and pay a commission. Brokerages divide roughly into three camps, though there is a good deal of overlap among them. So called full-service brokerages are usually the most costly. In return, they may offer a wider range of services, proprietary investment research and the personal attention of an individual broker. Discount brokers typically forego some of the frills -- you may not always speak to the same person over the phone, for example -- but charge lower commissions. At an online brokerage, you may not speak to anyone at all since you place trade orders directly on the Internet, sometimes at an even lower fee. There is no clean line between the types, though, and many firms offer all three forms of service, sometimes with tiered pricing.

If you place a market order with your broker, then you are saying that you're willing to buy at whatever happens to be the prevailing price for the stock at the moment the order is executed. If you think a stock’s volatility is such that you can get it at an eighth or a quarter point lower by waiting, you can set a limit order specifying the price you’re willing to pay. If the stock dips down to that level, your order will be automatically filled. Limit orders can be left open for a single day (a day order) or indefinitely (good until canceled).

After you’ve bought a stock, you can instruct your broker to sell it if the price drops to a level you specify (a stop loss order). That's a kind of insurance; it means that no matter what happens to a stock’s price you’ll never lose more than a specified amount. In a volatile market however, setting a stop loss order at 10 or 20 percent below the purchase price will sometimes cause you to cash out of the stock on a momentary dip -- thus locking in a loss even though the shares may immediately head back upward.

Many brokerages will lend you money to buy stocks, usually up to 50 percent of the value of stocks you already own free and clear. The interest charge is typically within a percentage point or two of the prime rate, or the current prevailing interest rate that banks charge corporate borrowers. This is called buying on margin, and it gives you the opportunity to own more shares of stock -- and hence profit more from any gains -- than you could otherwise afford. The downside: Not only will interest charges cut into your gains, but if the stock you buy happens to tank rather than rising, your losses will pile up faster too. For example, let’s say you buy 100 shares of a $20 stock at a total cost of $2,000. You pay half of that amount, or $1,000, out of your pocket. You borrow the other $1,000 on margin. If the price of the stock rises 30 percent, to 26, you’ll earn $600 -- which is a 60 percent gain on the $1,000 of your own money that you invested. But if the stock falls 30 percent, to 14, your losses are doubled. Reason: the 100 shares are now worth just $1,400 -- and $1,000 of that is needed to pay off the loan. So you are left with only $400, or 60 percent less than the $1,000 you invested.

If you have a margin account, you can also engage in another type of trading -- called short selling -- that lets you profit when a stock goes down. When you short a stock, you actually sell shares you do not own by borrowing them from the brokerage (hence the need for a margin account). Later, if the price heads downward as you expect, you buy back the same number of shares at a lower price and use those to repay the loan. Your profit is the difference between what you received for the original sale and what you spent to repay the loan, less interest costs and fees.

Shorting stocks offers a way to make money in a diving market. Problem is, if you bet wrong you can really lose your shirt. Here's why. If you are long a certain stock, meaning simply that you own the shares, the worst that can happen is that the stock becomes worthless and you lose 100 percent of your initial investment (assuming you didn't buy on margin). But if you are short a stock that then surprises you by doubling or tripling in price, which can happen with a volatile issue, then you could theoretically need to spend several times your initial bet to pay off the loan. (In fact, you -- or your broker -- will almost certainly bail you out of the loan before then, but not without big losses.)

For a few stocks, you can buy or sell shares without a broker by participating in a company's direct purchase plan or, if you reinvest dividends, in a dividend reinvestment plan (DRIP). Some firms levy no commissions at all to sell you their stock directly, though others do charge a fee. Only a small proportion of public companies offer such plans, however, and the ones that do may or may not be good investments.

Finally, when you buy stock, you have the option of having a certificate issued to you that represents the shares you own -- or of letting your broker hold the shares for you, in which case the shares are said to be held in street name. The advantage to owning shares in street name is that you don’t have to worry about storing your certificates or delivering them to your broker when you sell. The disadvantage is that if you switch brokerages, your old brokerage may charge you a fee to transfer the shares.

One point to keep in mind in all of the above is that it costs a lot more to trade stocks than many people realize. Brad Barber and Terrance Odean, two finance professors at the University of California at Davis, have shown that retail investors pay an average of 6 percent for one round-trip trade -- that is, to buy and sell the same shares of stock -- when you add together commissions, fees and the spread we mentioned earlier. So if you invest $4,000 in a stock and its value goes up 10 percent, you’ll have only about a 4 percent profit after trading costs -- and that’s before Uncle Sam takes his cut. In other words, rapid-fire trading to make a percentage point here or two points there is a very slow way to get rich, even when you’re smart -- or lucky -- enough to be right most of the time.

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