Stock Market Trading Basics

For the typical American the most common way to get rich is to make investments in either real estate or stock market trading. And even though most people possess a sufficient amount of money to get rich in stock market trading very few understand how it works; but the same people understand how to profit in real estate but very few have the money to do so.

This article is geared towards people who really don't know nearly anything related to the market, so please excuse me if you're an experienced trader and I over simplify things. Let's begin with the basics. What exactly is stock and exactly how should you trade it? "Stock" is in reality a fractional ownership in a business. What you actually buy is actually a share of that ownership. Imagine if a business breaks its monetary assets into 100 equal shares. If you purchase 1 share you theoretically have possession of 1% of the corporation.

This share additionally gives a 1% vote in how the company does business. The cost of that share depends upon the market's perception of valuation on that share. Due to the fact a business's actual assets and liabilities are fluid market price really doesn't stand for the exact value of that share but instead what a purchaser is prepared to pay for that share. When the corporation makes a profit; the profit is evenly divided up among all stock shares minus any cash the board decides to reinvest into the business or hold as an asset. These are termed dividends.

Because most corporations issue millions of shares of stock, your actual vote is actually pretty meaningless considering that a key group will keep enough of the business's stock in their own personal control so they will have a majority vote on all company decisions. The real reason why you ought to have stock would be to collect those dividends or to sell your shares once the value of the shares increase, consequently generating a profit.

Virtually all stock market trading is done by way of formal stock exchanges. The actual selling and buying is carried out by way of stock brokers who are permitted to trade in the exchanges. Anytime you buy or sell off shares these agents take a percentage, a set fee, or perhaps a combination or the two. This is where the smaller investor is at a disadvantage over a much larger one. Let's imagine you would like to own 1000 shares of XYZ, but you can only afford to acquire 200 shares at any given time. You have two options: either make 5 different purchases and give the fee each time or save up enough to acquire all 1000 shares and trust the cost doesn't go up too much in the meantime.

Since many good sized business shares can cost $30 or over it may well be preferable for that smaller investor to buy less expensive stocks which frequently have a greater price increase over time. This helps counterbalance the expense of selling and buying. Let's pretend you buy 1000 shares of a stock that costs $10 a share. In the event the value goes up $2.00 you earn a 20% gain minus your brokerage fees if you sell. It cost you $10,000 dollars and you sold for $12,000 minus fees. Not bad.

You might have bought double the shares of another stock at only $5.00 a share. If that stock increases $2.00 you would have essentially made 40% or $4,000 gain on the same $10,000 expenditure. Even though the probability of a $5.00 stock increasing $2.00 a share is not as likely, the possible benefit will be larger. And a small investor with little funds to invest can sometimes enjoy even bigger earnings by trading what is known as penny stocks; those equities which trade for less than a dollar. These shares can on occasion double or triple in worth in a very short time period.

The disadvantage to trading in penny stocks is of course trying to pick winners and losers. A large number of smaller companies have no track record so the beginner investor most likely is not in a position to know the difference between a low valued stock that is about to explode or one which is low because the stock shares are actually not really worth anything currently nor will they be in the longer term. This is why a small time investor shouldn't be investing in penny stocks without benefiting from substantial market analysis to back him up. The truth is no stock market trading should be done without it.

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