How does stock trading work?
Why Trade?
To understand how stock trading works, it’s important to first understand why it exists in the first place. Why do companies offer shares of their company to complete random strangers and then share with them their firm’s hard earned earnings?
Businesses, large and small, have projects and activities that they are confident will be very successful. Sometimes the capital (money and resources) they need for these activities is more than what they currently have. So, instead of taking out a loan from a bank, they offer to sell a share of the company in exchange for the funds they need. When they sell a share of the company, they’re agreeing to share their profits with investors.
As an investor, you purchase the stock believing that the business’s endeavors will be successful and that they will make more money than what you, and all the other investors, put in. What you receive in return is fancily known as your “return on investment”. However, a return on investment isn’t always positive. When the company you invest in profits, so do you. But when they don’t do well, then you’re at a loss as well.
When you hear talk about stock trading and shares, remember this: You buy the stock and share the risk. The only thing you “trade” is money for stock and vice-versa.
How does it work?
The truth is, there isn’t really just one “stock market”. There are stock exchanges in locations across the globe and the World Wide Web, creating several possible marketplaces for trading to occur. In the United States, the most predominant stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. These exchanges help bring businesses and investors together.
Each stock is given a price that is representative of its value, which is called the stock’s market price. At any given time while the market is open, investors can buy and sell stocks at the market price. The market price for a stock changes during this time depending on how well the business is going, how much stock is available to purchase, how much stock is wanted by investors, and other factors.
To invest in a stock, the first step is to let your stock broker know you’re interested. Then tell the broker how much stock you want for a specific company at the current market price. The order is placed. And someone willing to sell the stock (it could be the company itself) to you at the agreed upon price. Once the agreement is made, the exchange is complete. Congratulations, you’re now invested in a company.
What stock fits me?
Deciding which stock fits you, or rather which companies you want to invest in, can be a time consuming decision. The only reason choosing stocks is more complicated than choosing socks is because there are many things to consider, and most of which are unfamiliar if you’re new at it.
When choosing socks, you might already have a specific use in mind. If you’re playing soccer, you might need knee socks. For tennis, you may prefer crew. An important dinner requires something delicate. You probably know something about each sock brand’s reputation, the materials used to make the sock, and what color/style/etc you personally prefer. In other words, you’re an expert before you go to the store on the socks you want to buy.
Investors who purchase stocks also have to be experts before they buy and sell in the stock exchange. Traditionally to find the stock that meets their needs, investors conduct a lot of research on the company, and the current market “trends”. Market trends are influenced by the supply of stock (how much is available) and the demand for the stock (how much people are interested in buying). These factors (along with others) are used to predict and determine stock prices. So, investors are basically savvy shoppers – they know what to look for and have the time to look for it.
When it comes to deciding what type of stock you want, you should first think about two things: What results you want from your investments and what you want to invest. Everyone has different results they’re hoping for from their investment. Some purchase stock because they want a slow, steady, and reliable return. Others feel strongly about a company’s future and want to own part of it, regardless of monetary results.
But if you want to be the person that you’ve heard rumours about: The one who coolly leaves the stock market with nicely sized earnings – and you want it all to happen quick, in a short period of time, without investing your time in research – well, that can be tough to do.
