The stock market is in the news almost every day now. If you’re new to investing or just want to know a bit more about it, here is a guide to the stock market for beginners.
First, you have to know what the stock is. Stocks, also called equities, are small pieces, or shares, of ownership in a company. Companies sell these to raise money for any number of reasons, from financing large capital purchases to expansion of their operations. Trading ownership in a company for money like this is called equity financing.
Once the company decides to sell shares of itself, there needs to be a place to sell it, preferably a place where like minded people congregate to buy and sell such shares. That place is called the stock market. In some cases this is an actual, physical place. The New York Stock Exchange has an exchange building in New York City. Other exchanges, such as the NASDAQ (pronounced nas-dak) exist purely in the virtual world.
Stock exchanges exist in many of the world’s developed countries, with the largest ones being concentrated in the financial centers. Japan has the Nikkei in Tokyo, Britain has the London Stock Exchange, and Hong Kong is home to the Hong Kong Stock Exchange. Typically a company will be traded on the exchange in it’s home country’s exchange.
Any trade needs two parties, a buyer and a seller, and stock trades are no different. If you’re buying or selling shares on any of the larger exchanges, you won’t do the buying and selling directly, you’ll go through an intermediary called a broker. Brokerage firms have what is called a “seat” on the exchange, meaning they are authorized to do actual buying and selling on other’s behalf.
Your job is to choose what company you want to buy or sell. This is normally done through careful research, either the old fashioned way, or using sophisticated software. The are nearly as many schools of though on choosing companies to invest in as there are companies in which to invest.
There are two general ways you can trade stocks. You can have a full service broker that assists you in determining a company in which to purchase stock. If you’re more the type that likes to make their won decisions you’ll probably use a discount broker that will allow you to pick your own stocks, then buy them through a telephone call or by going online to the broker’s website. Either way the broker makes the transaction.
There is usually some sort of charge or fee paid to the broker to make a stock trade. The full service broker will typically charge more to cover their greater service. The dawn of the Internet has allowed people to have huge amounts of industry, market, and company data at their fingertips. This enables people to do their own research that was simply not possible 20 years ago.
One of the main criteria in choosing a company in which to buy stock is to know why you’re buying it. Are looking to fund retirement that’s years away, or are you trying to make money relatively quickly. Perhaps you need to preserve savings you have in the face of possible inflation. Strong future inflation could be a very real concern as the U.S. government continues to print and spend money for various bailout and stimulus packages.
Once you’ve chosen a company in which to invest, you’ll need to contact your stock broker to purchase shares. They make the trade for you. You’ll be able to choose from several kinds of orders; you’ll place either a sell or a buy order, depending on weather you’re selling or buying. There can also choose weather you want to place a market or limit order.
A market order is executed at the market price as soon as the trade can be made. With a limit order, you can set limits on how much you want to pay or sell for. If the stock goes above the limit you set in the case of a buy order, the trade will not be executed. This protects you from paying more than you want to for a particular stock in the event the price is rapidly moving.
One of the keys to trading stocks is to know why you’re trading, and choosing the broker that most closely matches your needs. If you want the freedom and flexibility to make your own trades when you want to, choose the online broker that has the features and level of service you’re comfortable with. Pay careful attention to the research tools they offer, and how user friendly their online interface is. You should also check their rates. Look at any monthly fees and their cost per trade.
Just because you are a novice doesn’t mean that you should stay away from the stock market. Even in a down economy there are is still money to be made there. After all, many excellent companies have seen the price of their stock fall dramatically in recent months. This means they represent excellent values for the seasoned investor and the stock market beginner alike. Visit our website for the honest review.