What is stock trading? Learn how the stock market works

What is stock trading? – Ever wondered what stock trading is? This article will guide you through about everything you need to know about stock trading, stock market and the brokers.

What is stock trading?

Stock trading is the process of buying and selling of shares in a place called “stock market.” A stock market is a place where investors meet to buy and sell shares. In the stock market, investors buy shares (they become part owners) in companies traded by the public, and then sell back the shares (relinquishing their part ownership) for profits. The idea here is buying and selling of shares from companies around the world.

There are various strategies through which one can invest in the stock market. However, whichever strategy employed by an investor, in the end it all boils down to him buying and selling existing shares on the NASDAQ, New York Stock Exchange (NYSE), or other stock marketplaces.

Stocks are listed in exchanges by short names known as “ticker symbols.” If you search these ticker symbols: “TWRT,” “FB,” or “MSFT” on your broker’s website, you would see a price quoted for each. The price you would see for each ticker is the amount investors paid for the most recent lot of Twitter, Facebook and Microsoft.

The prices in stock market tend to move swiftly because the demand for stocks increase and decrease, following latest news and investors’ attitude. Hence, the price quoted for a stock may not be the same price an investor will pay when he tries to buy it.

This is what happens when you make a trade

If you want to make a trade, you will issue a market order with your broker which will signal that you would like to buy a certain amount of shares in a stock. You’ll have to be patient because your order won’t be completed immediately. Your order will be sent to a stock market to look for a seller.

When you make a market order, you’re agreeing to buy the stock at the available price at the time the order was executed. As I mentioned above, the price of stocks rise and fall frequently. Hence, the price of a stock at the time it was executed is likely to be either higher or lower than the last traded price available when the initial order was made.

When a market order is made, it is guaranteed to execute, regardless of how high the price goes. For this reason, you have the option to make a limit order. In other words, you can set a limit to the maximum price you can pay for a stock. The only drawback about this feature is that limit orders always incur a higher fee, and the execution of your order may not be guaranteed.

What it means to make a stock trade

When you make a stock trade, it basically means that you are entitled to part of a large company’s shares. Consider stock to be a security that gives an investor a share of ownership in a company; the investor automatically becomes a part owner of the company’s assets. Your claim to the company’s assets and earning will depend on the number of shares you own in the company as compared to the overall number of outstanding shares.

Here are the two reasons why investors buy stocks:

  • Investors buy stock to make money
  • To have influence in the company.

When you hold company stock, it means that you are one of many shareholders entitled to everything owned by the company. The more you hold on to a stock, the more it is likely to increase in capital and a good return. However, due to the fluctuation in price, there is no guarantee that the company you have invested in will do well.

Important things you should know about stock trading

  • A share of a stock is a small piece of a corporation. The shareholders are the people who buy stock to invest in the future of a company. They become part owners of the company for as long as they own their shares. The performance of the company, economic conditions and investors’ attitude will determine the price of a share.
  • Initial Public Offering (IPO) is the first time a company offers its stock for public sale. Sometimes it is also referred to as “going public.”
  • A company can share the profits it made with its stockholders by issuing a dividend. A company can also re-invest its profits by hiring new people or making improvements. When stocks issue frequent dividends, they are known as income stocks. However, stocks that re-invest their profits are known as growth stock.

Who is a broker?

A Broker is a person licensed to trade stocks through the stock market or exchange. In other words, brokers buy and sell stocks through stock markets or stock exchanges, and they charge commissions to do so. Brokers can trade on the trading floor or electronically, or even by phone.

What is a stock market?

A stock market or an exchange is a place (like a warehouse) where people buy and sell stocks. The stock market comprises of buyers and sellers (just like in any marketplace). Stock markets used to be literal places; they were trading floors in Tokyo, New York, Frankfurt and London where prices for stocks were set in ongoing live auctions. Today, most transactions are done electronically. Investors can access these e-marketplaces by placing an order through a broker, just like in Forex. The cost for every trade is anything from $5 to $10 per order – the amount depends on your broker.

The buyers and sellers trade existing (previously issued) shares that are offered by an investor and bought by another investor. A computer or person will match every buy order to a sell order, and the other way round. Some stock markets or exchanges use electronic means to match buyers and sellers, and others work like auctions on a trading floor.

Below are some major stock markets or exchanges:

  • The NASDAQ.com  – this exchange uses electronic means to trade. It is an electronic stock exchange.
  • The New York Stock Exchange – this stock exchange trades stock on a trading floor, using auction method.
  • The Tokyo Stock Exchange (http://www.tse.or.jp/english/) – this is a Japanese stock exchange.

Here is the list of all major stock exchanges on Worldwide Stock Exchanges (http://www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.htm). This list does not include Over-the-counter (OTC) stocks. Check out information on OTC stocks at OTC Bulletin Board (http://www.otcbb.com/) or PinkSheets (http://www.pinksheets.com/index.jsp).

If you wish to buy and sell stocks online, you will need an online broker. This online broker takes the place of a human broker. You will trade with real money, the only difference is that instead of talking to a person concerning investments, you will make the decision on which stocks to buy and sell, and you will request your trades yourself. Although, some online brokerage firms offer live assistance or advice to their traders as part of their services.

Since not all brokerage firms offer live assistance, if you need assistance with your trades, you’ll need to choose a firm that offers this service.

Types of Stock

The following are the two types of stocks:

  • Common stock
  • Preferred stock

If you own a common stock in a company, you will be entitled to vote on corporate decision making and to receive dividends. However, if you own preferred stock, you will not be given voting rights, but when it comes to receiving dividend payments or any payment distributed when a company’s assets are liquidated, you will have priority over common stockholders.

Stock market watchers

The News Media and market watchers like to keep track of the market’s movement by watching the following three popular indexes:

  • The S&P 500 follows the fortunes of 500 most valuable companies in US.
  • The NASDAQ composite only measure companies listed on the NASDAQ; the index is dominated by high-growth and technology driven companies.
  • The Dow Jones Industrial Average (the first broad index stocks) keeps track on 30 leading companies in US.

How investing in Mutual Fund works

Mutual fund pool money from different investors to invest in a large group of assets, such as stocks or bonds, collectively known as a portfolio. When a person invests in a mutual fund, unlike an individual stock, he will own a piece of the fund and not the assets tied to it. Though he doesn’t own the mutual fund’s assets, the value of the assets is directly tied to the value of the fund and eventually, his shares.

The good thing about mutual funds is that the shares are affordable, and easy to redeem. Also, it provides streamlined professional management and allow investors to easily diversify their portfolios. Diversification is something to consider in stock trading, as it reduces investment risk because smaller amount of your money will be tied to many companies instead of having all your money tied up in one company. In a layman’s understanding, it is better to put your eggs in different baskets than putting all of them in one basket. Diversification sets in immediately a person invests in a mutual fund because the fund he invests in owns multiple assets.

Worth knowing, mutual funds are open-ended, hence, if an investor is interested in investing in the fund, a new share will be created for him to purchase. An investor will be required to pay fees and expenses associated with the fund regardless of how the assets perform.

How investors earn money with mutual fund

The following are the several ways investors earn money with mutual fund:

  • Investors earn money from capital gain – when a security with an increase in price is sold by a fund – investors will make profits.
  • Through Net Asset Value – the value of the shares of an investor automatically increases when the Net asset value of a fund increases.
  • Investors also earn from dividend payments. If you hold stock in companies performing well, you can also earn money via dividend payments – they are issued when a company shares some of its earnings with its stockholders. And the amount you will get depends on the dividend each share gets multiplied by the total number of shares you own in that company.

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