For those who do not understand the concepts behind stocks, trading can appear to be very confusing. Therefore, it is essential to learn the basics first before getting your feet wet. It is only after thorough understanding and analysis of stocks that buying or selling can be a profitable venture. Entering the stock market without knowing the stock trading basics can be disastrous.
Understanding the meaning of stocks
In simple terms, a stock is a share in the ownership of a company. A stock represents the company’s assets and earnings. The more shares you own means more stake in the company. Share, equity or stock has the same meaning and are used interchangeably. The stock’s price is dependent on the earnings and profitability of the company but other external factors such as global market conditions also affect the price. An individual buys some shares of the company that he believes will grow in the future, in the hopes of selling them at much higher prices. One can also earn through the dividends that some companies give to the stockholders on a regular period.
How are stocks traded?
Before understanding the stock trading basics, it is essential to know how stocks are traded. Basically, there are two ways a stock is traded. One is floor exchange method while the other is electronic exchange method. Though efforts are being made to promote the electronic exchange trading, floor exchange trading is still the most preferred way of trading stocks.
Floor exchange method
Imagine the scenes you see in movies where hundreds of people inside the stock exchange can be seen shouting and gesturing to one another. Similar chaos is witnessed by anyone working on the trading floors. If an investor wants to buy 100 shares of a company, he directly calls his stock broker. The stock broker then calls the floor clerk to find other brokers who wants to sell 100 shares of that company. The stock broker and the seller agree on a price for the sale, where the broker collects a percentage of the gross amount as commission. The agreed price and transaction details are officially communicated to the buyer through email, which confirms his ownership in the shares of the company.
Electronic exchange method
In the electronic exchange method, transactions take place in the same way except that they are done electronically. Buyers and sellers are matched online and transactions takes place almost instantaneously. The electronic gateway is provided by an online broker.
Why are stocks traded?
Thousands of stocks are traded everyday due to different reasons. Some people trade because they want to earn money. There are others who participate simply for the thrill, even without knowledge of stock trading basics. Trading stocks is also a great way to learn about how the government regulates commodities. Stock trading can be an additional source of income, or even a primary source of income if the investment is substantial.
Stock trading basics can be understood in a better way by watching business news and through online tutorials.