Understanding Stocks, the Market, and Trading

You can’t go long into adulthood without hearing people talk about stocks and trading. And while you might nod your head as you listen to people talking about shares and growth and voting rights, you’re letting a world of opportunity pass you by if you don’t learn about stocks and start thinking about strategies for trading them yourself.

What are stocks?

The ownership of a company is divided into portions of equity. In private companies, especially small ones, 100% of the equity might be owned by a few partners. In larger companies, the equity might be split up among hundreds of partners. It’s only when a company goes public, and makes portions of its equity available to the general public, that the equity shares become trade-able stocks. So when you buy a company’s stock, you’re essentially buying a portion of the company ownership. That entitles you to dividends that the company decides to pay out to shareholders and may give you certain voting rights within the company.

What is the market?

The so-called market is essentially the place where stocks trade hands. Whether you want to buy stocks or sell them, you’re entering the market to do so. All stock purchase and sale transactions are put through one of the many markets that exist, such as the New York Stock Exchange. The job of these markets is to find buyers for sellers and vice versa. Many people get indexes and exchanges confused. To avoid this, remember that an index is simply a means of tracking the performance of a group of equities, bonds, mutual funds and other investments. An exchange, on the other hand, is the actual marketplace where these positions exchange hands.

What is trading?

When you buy a stock, not only do you get certain ownership rights and dividends, you also have the ability to someday sell that stock after it rises in price. It’s just like buying and selling any other hopefully appreciating asset–you make a profit when you sell it at a higher price than you bought it for.

Generally, when you buy stocks, unless you’re buying an IPO (initial public offering) you are buying in the secondary market, meaning that you’re buying from another shareholder rather than directly from the underlying company itself. This gives you the opportunity to time your purchases for a low price and then resell at a higher price later.

Trading stocks takes more than just an understanding of the market, however. You also need an account with a trading platform that gives you access to the marketplace and executes orders in a timely fashion. When trading, even a one-second delay can hurt profit margins. You also want to look for a trading platform that has affordable fees and commissions as well as in-depth tracking so you can accurately record your taxes with the right cost basis and sale price of each position traded.

Trading stocks can be a high-risk, high-reward activity but you’ve got to understand at least the basics of what you’re doing. As your experience, knowledge and understanding grows, you can begin thinking about even more sophisticated moves such as trading options and futures and possibly becoming a high-frequency trader. That exciting and prosperous future just needs to start with the basics — trading stocks through your online account.

Leave a Reply