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A Short Guide To Trading Stocks
By Mark Crisp (Stress Free Trading)
To make money in stocks requires first, an understanding of how the stock market works, and second, a sound strategy for buying, selling or holding stock (as the case may be). Here is an outline of what a stock is, how the stock market functions, and most importantly, how to make money in stocks.
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.
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.)
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".
Short term traders, on the other hand, dismiss the utility of fundamental information. Because their time horizon for trading is much shorter - often varying from a matter of hours to a few days, sometimes longer - they see a market that is much more volatile. Within hours, days, weeks or even months, the stock price of a company may not only vary widely, but also bear little resemblance to the company's financial performance.
Traders therefore often opt for a "technical" approach to the stock market. They use technical analysis, which involves analyzing and modeling price data, to inform their trading activity.
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 the systematic process used by a trader to govern how they trade. There are probably as many trading systems as there are traders, and plenty of books, home-study courses, seminars, etc that also claim to teach profitable trading strategies and systems. Indeed, many traders say that the most important determinant of being successful in trading is having - and sticking with - a tried-and-true system.
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. By: Mark Crisp (Stress Free Trading) Article Directory: http://www.articledashboard.com 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 www.crispstocks.com
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