(MONEY Magazine) – Whenever the conversation turns to trading stocks--and when doesn't it, these days?--I remember a neighborhood coffee shop I frequented years ago. No, it didn't rake in billions as www.greasyspoon.com. The arcane language I heard is what stuck with me. Rye toast wasn't rye toast, it was "whiskey down." (Rye as in whiskey and down as in put it in the toaster and push the handle down.) Order a tuna salad sandwich on toast, and the waiter would shout into the kitchen, "Give me a radio!" (This one is still an enigma to me, but I think it has something to do with tuna sounding like a "tuner," as in a radio tuner.)

What does this have to do with trading stocks? Well, stock traders also employ a cryptic language. And if you engage in the new national pastime of trading individual stocks before becoming familiar with the esoteric lingo, you could end up getting burned far worse than whiskey down left smoking in the toaster. This month, I'll explain trading terminology and, in the process (I hope), give you a better idea of how the stock market operates. Then, just when you know how to talk the talk and are eager to walk the walk--that is, trade--I'm going to suggest that you use your new knowledge sparingly.

Trading basics. Whether dealing with a broker face to face, over the phone or trading online, the majority of individual investors buy or sell stocks using a market order. This type of order assures you of two things: You'll get the prevailing price for a stock, and you'll actually complete the purchase or sale.

But there's also a downside to market orders: You have no control over what price you will get. In the few minutes or less it takes for your order to filter its way to an exchange or to a computerized trading system, the price could go up or down, in some cases by a significant amount. When the doyenne of domesticity Martha Stewart went public last October, for example, her company's stock soared to $49.50 a share after opening at $37.25. Sanity later set in, and the stock closed just under $36. Hey, I love Martha. But if I'd paid nearly 50 bucks for a stock that just hours later sold for $12 less, I'd feel sillier than if I'd mixed my Wedgwood dinner plates with Tupperware serving bowls.

Setting limits. You can set a ceiling on the purchase price that you'll pay or a floor on the sales price you'll accept by using a limit order. For example, if you had entered a limit order for Martha's stock at, say, $38 on its opening day, your trade would not have been executed during the big spike in the price. You would likely have acquired it at a price of $38 or less.

When you're dealing with volatile stocks or situations that can trigger big swings in price (a market meltdown or reopening trading in a stock in the wake of a major news announcement), limit orders can prevent you from paying more than you would like for a stock or selling it for less than you want. However, these orders also have their limits, so to speak. If the stock stays above your limit on a buy order or below it on a sell order--or if other limit orders gobble up all the shares available at the limit price--the trade isn't executed. And while limits do offer some protection, they don't assure you'll make money in a stock. Martha, alas, has recently been trading in the $21-to-$28 range.

There's another reason to consider a limit order: It can sometimes give you a shot at a slightly better than market price. To attempt that, you need to understand how stocks are priced. There are two quotes on each stock: the bid (the price at which a marketmaker or another investor will buy the stock from you) and the ask or offer (the price at which someone will sell the stock to you). The difference between these two quotes--typically 1/4, 1/8 or 1/16 (a "teenie" in trader parlance) of a dollar--is known as the bid/ask spread. When you place a market order, your trade is executed at the NBBO--national best bid or offer. So if shares of Florida Rock, a company that produces ready-mix concrete, were bid at $37 and offered at $37.25, a market order to buy 100 shares would be executed at the offer price of $37.25.

But you might be able to get a better price by placing a buy-limit order inside the bid/ask spread, say at $37 1/8. (Pros call this driving the inside.) You're essentially hoping that an impatient seller will accept your price, saving you the difference between your limit order and the posted offer.

To pull off such a trade, you've got to know the current bid/ask quotes on the stock. Fortunately, that information is available free at a number of websites (see the box below). In addition, these sites also show the bid and ask size, that is, the number of shares available at the quoted bid and ask. Some brokers, including Fidelity and E*Trade, offer active customers an even deeper level of data known as Nasdaq Level II quotes. These quotes show the bids and offers from a variety of marketmakers in the stock, plus the bid and ask size for each quote.

The question, though, is whether it makes sense to try to squeeze in between the bid and ask. If you're buying or selling a stock that trades frequently--such as Microsoft or GE--the spreads are probably too narrow to make it worthwhile, in my opinion. Gaining 1/8 on a 100-share purchase would net you a whopping $12.50--maybe less, since some brokers add a surcharge of $3 to $5 for limit orders. But if you're trading in large quantities or dealing in illiquid stocks with big spreads, this ploy is worth considering. Of course, if you're convinced a stock is likely to fall, you could place a limit order much farther below its current price--several dollars, say. If you're right, you may pick up the stock at your limit price. If not, you won't get the stock.

Pulling out the stops. Another type of order you should know about is a stop order. Let's say that last November you paid $25 a share for 100 shares of Pinnacle Holdings, a Sarasota, Fla. company that provides space on wireless-communications towers and that recently traded at $40.50 a share. You're thrilled with your paper profit, and you would like to hang on to at least some of your gain even if the stock goes down. You can, sort of, by entering a sell-stop order (also called a stop-loss order) at, say, 15% or so below the current price of the stock, or $34 in this case. If Pinnacle drops to $34, the stop triggers a sell order to unload the stock, and you keep a $9, or 36%, profit.

But stop orders have two potential pitfalls. First, you may end up selling when you don't really want to. On Dec. 30, for example, Pinnacle shares plunged from $40 to just under $30, only to rebound to more than $42 the very next day. If you had set a stop order at $34, you would have been "stopped out" of this stock. "And you'd probably feel pretty stupid the next day when the stock was above $40," says Andrew Brooks, head of equity trading at T. Rowe Price.

The other problem is that you can't assume the trade will be executed at the stop price. When a stock hits your stop price, it triggers a market order. If the market is in a freefall, the price could sink a few bucks or even much more below the stop price before your stock is actually sold.

You can protect yourself against the possibility of selling well below the stop price by placing a stop and limit order rolled into one--a stop-limit order. So if you set the stop price at $35 and the limit at, say, $32, a limit order would be entered when the stock hit a price of $35 and a sale would take place only at $32 or higher. Though less common, some investors use stops and stop-limit orders to buy stocks, usually when they believe a stock rates a "buy" after climbing to a certain target price. As with a regular limit order, though, there's no guarantee that your trade will be executed.

The downside of trading. At this point you're probably itching to unleash a flood of market, stop and stop-limit orders on a couple dozen stocks. But before you make a move, there's one last thing you ought to know: The more you trade, the lower the returns you'll likely earn.

That, at least, is the conclusion University of California-Davis finance professor Terrance Odean came to after studying the performance of the discount-brokerage accounts of 66,465 households. As the chart on page 75 shows, the most active traders earned an annualized five percentage points less than average traders and seven points less than the least active traders. Why do active traders stink up the joint? Odean points to two reasons: "transaction costs in the form of commissions and bid/ask spreads, and poor stock selection. Basically the stocks that people bought tend to perform worse than the ones they sold."

That's not to say trading can't provide a satisfying rush, much like being on a roll at the craps table. But in the long run, the house--whether it's the Trump Taj Mahal or a brokerage firm--always wins. My advice: Whenever you feel the need to trade to satisfy some inner craving, go eat a radio.

Senior editor Walter Updegrave is the author of Investing for the Financially Challenged (Warner Books). You can reach him at investing101@moneymail.com.