A Quick Guide To Stock Trading Basics

First of all, a “stock” refers to a share of ownership in a company. Companies sell stock to raise capital. Companies that trade on stock markets are public companies that have issued stock to the general public. Each person who owns stock has a number of shares in the given company, which give them corresponding ownership rights. For example, they may be entitled to voting on major company decisions and to a share of dividends (profits distributed to stockholders after the company’s interest expenses and taxes are paid). Having said that, there are different kinds of shares that have different types of rights attached. Most stock traded on the stock market is comprised of “ordinary shares” which gives you voting rights and the entitlement to dividends.

The “stock market” actually refers to all the stock exchanges where shares in companies may be traded. When it first issues stock to the public, a company chooses the stock exchange it wishes to be listed on. Most companies list on one exchange, although some very large corporations are listed on more than one exchange. This means that you can buy and sell stock in that company on each of those exchanges. Some of the major exchanges are the New York Stock Exchange, the Tokyo Stock Exchange and the London Stock Exchange.

When you buy or sell stock, you need to go through a stock broker. They take a fee or commission in return for facilitating the trade. Pre-Internet you generally needed to call up brokers to place your orders; now you can issue a buy or sell order by filling in a form on one of the numerous online brokerages.

Okay, so there you have some stock trading basics regarding the nature of stocks and the stock market… but how do you make money trading or investing in stocks? Well, in theory, the price of each share is indicative of the value of the company. As the fortunes of the company improve, the price should theoretically increase, and vice versa. If you buy stock in a company believing that it will become more successful over a given time frame, you should be able to sell your stock in the company when it’s price has increased and make a capital gain. Alternatively, you may wish to hold on to your stock and keep
it as a long-term asset, or rely on any dividend income.

That’s the theory anyway, and it virtually sums up how many investors approach stock market investing. They look at a range of fundamental data – in particular financial data (e.g. sales, profits, debt level, growth and certain financial ratios) that relate to a given company, and choose whether or not to invest accordingly. Analyzing such data is known as “fundamental analysis”.

People who trade stocks (as opposed to invest in them) – “traders” – take a much shorter-term view of the stock market. Over the short term, the stock market may not seem all that rational, with company share prices NOT seeming to indicate value at all. Short term movements in stock prices are effectively ruled more by the collective psychology of the market than corporate value.

Traders seek to use the short term volatility of the stock market to their advantage. They use “technical analysis” – analyzing trends and patterns in stock prices – in order to spot opportunities to profit on upward, downward and even sideways price movements.

Investors who use fundamental analysis on the one hand, and traders who use technical analysis on the other, take very different approaches to stocks. However, both can make money. Technical analysis has a bit more of a mystique about it because of the “black box” nature of many of the stock trading systems used by traders.

A trading system is a methodology used by traders to identify and capitalize on profit opportunities. Some people sell trading systems, while many (if not most) professional traders keep their trading systems to themselves. Other pro traders routinely change their trading systems where they believe the given system has lost its usefulness.