A Short Guide to Trading Stocks
By: Mark Crisp | Posted: 22nd February 2008
Interested in trading and investing in stocks? Well, the first step is to understand some stock trading basics. In this article we'll take a look at what stock market investing and trading involve, and how investors and traders make money from stocks.
A "stock" - more commonly known as a share in some parts of the world - means a portion of ownership or equity in a company. As such, a stockholder is essentially an owner of that company with specific rights and obligations. Companies list on the stock market - or more precisely, a specific stock exchange - to sell their equity to the public, and thereby raise capital they can use to grow their business. Once a company has listed on a particular stock exchange its shares can be traded on an ongoing basis by investors and traders alike.
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.
Unless you have the requisite licence, you can't directly buy and sell stocks yourself. You need to pay a broker to do so on your behalf. Historically, you might have called an individual broker to transact a trade for you; these days it's often just a matter of visiting an Internet based brokerage and filling in an order form.
How to trade stocks comes down to your goals, financial wherewithal, skills and beliefs. In theory, the price of any company's stock reflects its value. If you're confident that the value of that company will increase, then so too, should the value of your stock. You can then sell the stock for a profit... or hang on to it. (You might hang on to it if you think the company will continue to do well in the future, or because some generous dividends are on the way, or because your stake is such that you can borrow against it for other investment purposes.)
"Fundamental" investors are those who do in fact take the view that, over time, stock prices reflect the value of a company. How do these investors assess value? Well, they study a range of fundamental information that will supposedly give them a glimpse into the future prospects of the company. This ranges from the company's own financial health, to the health of the industry in which it operates, to the strength of the economy at large. After performing such fundamental analysis, such an investor decides how to trade stocks they're interested in.
The other main type of investor is not really an investor at all - he or she is really a "trader". A trader typically rejects a long-term approach and seeks to make money in stocks by taking a much shorter term view. Since, in the short-term, prices of stocks are much less indicative of a company's value, there is often little point considering all the fundamentals. What matters is the market's perception of value, not necessarily a company's real value.
Given the capriciousness of the stock market in the short term (i.e. minutes, hours, days and weeks), traders often prefer to use "technical analysis" - the art and science of evaluating price data - in order to issue trades. Technical analysts study price trends - depicted in charts - and draw conclusions about where the price might go next. Then they buy, sell or hold on that basis.
Both "fundamentalists" and "technicians" can make money in stocks. One of the world's wealthiest individuals, Warren Buffet, is a well-known advocate of investing on the fundamentals. On the other hand, there are many traders who swear by a technical approach. In particular, technical analysis holds an allure for many people who are excited by the idea of using a "super secret" trading system to make huge profits.
Trading systems can vary widely. Essentially, a trading system is the step-by-step approach used by a trader to make money in stocks. While there are general approaches to trading e.g. trend following, candlestick charting and others, any given trading system is likely to be tailored by the trader to suit themselves.
There's no question that it's possible to make money in stocks. It's also possible to lose - so it's a good idea to learn as much as you can about stock market investing and trading.
Mark Crisp is an experienced stock trader and the creator of the Momentum Stock Trading System which focuses on big moves for big profits. Click here to get your complimentary copy of The Seven Habits of a Successful Trader from http://www.crispstocks.com
About the Author
Occupation: Stock Trader
The Momentum Stock Trading System focuses on big moves for big profits. Mark Crisp provides a complimentary copy of the "7 Habits of a Highly Successful Trader" at
www.StressFreeTrading.com
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Tags: money, large corporations, investors, brokerage, investing in stocks, stock trading, stock exchanges, york stock exchange, new york stock, new york stock exchange, london stock exchange, stockholder