The Stock Market 101: Part 1
Introduction
Apart from the glitz and panache of Hollywood or the iconic World of the pop star the stock market is probably seen as the most glamorous way of making a living (and a very healthy living at that!). Over recent times advances in technology have made the Stock Market far more accessible to the general public. This has made the possibility of becoming rich from stocks far more realistic than obtaining a record deal or a landing a role in a Hollywood production. Unfortunately involvement in the Stock Market is not a one-way street. It is commonly acknowledged that losing a fortune in Stocks is much easier than gaining one. You will constantly see figures touted for the percentage of people who lose money trading or investing. They range from 90% to as much as 99% depending on which ‘market guru’ is selling you their foolproof guide to making money. The true pros, however, will tell you the key to being a successful Stock speculator is being able to make decisions for yourself based on your own set of rules. Just like a baby learns to crawl before learning to walk and run, you must begin by learning the stock market basics. Ignoring the Hearsay
The chances are that all you hear concerning the Stock Market comes from either a work colleague or the ten-second report delivered on your evening news. This news report is as interesting as it is useful, not at all. On the other hand what you hear at work should be ignored for other reasons. If you are a complete stock novice, no offence intended, this hearsay might sound very interesting and possibly even tempting. The typical conversation will go something like this: Colleague: “Did you hear about Mike from payrolls?”
You: “No, what about him?”
Colleague: “He made a few grand from Stock ‘WXYZ’ last month.”
You: “Wow, I could really do with that money right now.”
Colleague: “Me too. He says he has a few more hot tips for us if we are interested.”
Well done to Mike, but the chances are the next conversation you have with this colleague will go something like this: Colleague: “Have you seen Mike from payrolls?”
You: “No, why?”
Colleague: “I lost my shirt on that ‘hot tip’ he gave me. I want to give him a piece of my mind.”
Although this conversation is complete fiction it is not at all unrealistic. It serves as a classic example as to why you should learn to make you own investment decisions, and pay no attention to what your friend at work or drinking buddies down at the pub think. Shares, Stock and Equity
When the media, your broker or your mates talk about The Market you will hear them use the terms Stock, Share and Equity. Slightly confusing, you might think, but the reality is they all mean the same thing. Examples of how the terms are used can be seen below: Stock – “I’m a big time player in the Stock Market.”
Share (s) – “Sara just bought 2 000 shares in company ‘XYZ’.”
Equity – “Now over to our financial correspondent and a look at today’s Equity Market.” All of these terms mean the same thing, partial ownership of a company, and all three are interchangeable in any of the above examples. The more Shares you acquire the greater your stake in the company becomes. As a shareholder you will have a claim to a portion of the company’s earnings, paid in dividends, and any voting rights attached to the share. It is standard practice to have one vote per common share to be used when electing the Board of Directors. It is the Board’s responsibility to increase the value of the company (your share) for you so it is only right that you get a say in who gets appointed. Just because you are a partial owner it does not mean that you will be in any way responsible for the running of the company, nor does it afford you a discount on any of their products or services! It used to be the case that shareholders were presented with a certificate to prove their ownership. If you had wanted to sell your shares you would have had to take the actual certificates the exchange. However, with the birth and evolution of the computer and electronic trading this is no longer necessary. You can now buy and sell your shares with the click of a mouse or a phone call and you are no longer issued with a certificate. To ease the flow of transfer, certificates are now held in electronic form by your broker (in street name). This makes it possible to transfer ownership (buy and sell) in a fraction of a second. In fact day traders do just that, many times every day. Why Issue Stock?
So why do companies issue stock in the first place? Lets face it; it means they share their ownership and their profits with the general public for the price of a share. The reason is to raise money. By selling off a slice of their business they can raise hundreds of millions of dollars without having to pay any of it back or pay any interest on it. This method of raising funds is knows as equity financing. The alternative to equity financing is debt financing. This is where a company issues bonds or takes out a bank loan. What Happens if the Company Goes Bust? If the company you have invested in goes bust then you are only liable for the amount you have invested in that company, i.e. the number of shares you own multiplied by the initial cost of each share. This does not mean that creditors will come after you for that amount it simply means your shares will be worth nothing. Only once the creditors have sold off the company’s assets to cover its debts the shareholders have a claim on any assets remaining. This is known as absolute priority. Stocks Vs Bonds As we know bonds are a form of debt financing. To invest in bonds does have some advantages over buying shares. For example, you will receive a guaranteed interest payment throughout the life of the bond (some companies don’t pay dividends) and you are guaranteed the return of your initial investment known as the principal. We already know that this is not the case as a stock’s price can just as easily fall from the value at which you made your investment. However, with greater risk comes greater reward; traditionally stocks have outperformed bonds on rate of return. Preferred Stock So far the shares/ stock we have referred to is known as common stock. As the name suggests this is the most widely traded type of share. However, there is another type of stock, preferred stock. This is a cross between common stocks and bonds. Preferred stockholders are repaid before common stockholders (but still after creditors) if a company goes bankrupt. They often pay a guaranteed dividend for life. Frequently the issuing company has the right to buy back their preferred stock at any time for a premium. One downside of being a preferred stock holder is they usually come with a lack of voting rights. Examples of companies currently issuing preferred stock are: MBNA – Ticker: KRB-B, KRB-C
TransCanadaPipelines ltd - Ticker: TRPPR
Merrill Lynch – Ticker: MER-B, MER-C Market Exchanges: Home of Shares
Exchanges are where shares are traded, i.e. where buyers and sellers meet to decide on a price for a share. That doesn’t mean you have to go down to the exchange yourself; your orders are sent via your broker to the exchange where orders are matched. The two major exchanges in the US differ slightly in the way they operate. They are the NYSE and the NASDAQ. The NYSE The New York Stock Exchange is the oldest exchange in the US and the most highly regarded in the World. It is home to many of the US and the World’s largest and most famous companies such as McDonalds, Coca-Cola and Citigroup as well as the DJIA and S&P 500 indices. The NYSE is still a listed exchange. By this we mean buyers and sellers are matched by floor traders with the help of computers. This means that executions are slightly slower than those conducted at virtual exchanges which are totally computer run. You have probably seen the floor of the NYSE at some point during your life on the news or if you tune into Bloomberg TV. You will notice the floor traders waiving their arms around frantically at trading posts which is where each company trades. Think of the NYSE as a huge auction room with one major difference: in stock auctions prices aren’t constantly being bid higher, they are being offered lower too! The NASDAQ The National Association of Securities Dealers Automated Quotations is the major over-the-counter (OTC) exchange. This means that it is more of a ‘virtual’ exchange in as much as there are no floor traders or even a floor. Dealers using a sophisticated network of computers match orders. The technology boom of the 1990s has been a huge boost to the NASDAQ. It is now home to some of the largest companies in the World such as Dell (DELL) and Microsoft (MSFT). Previously OTC exchanges had only been used by smaller companies but this all changed with the massive value expansion of the tech. sector. The exchange is also very popular with the Internet Sector; Google, Ebay and Yahoo are all listed on the NASDAQ. On the NASDAQ, brokerages act as market makers. The role of the market maker is to match buyers and sellers for a particular stock. They must maintain a quote at all times (a bid and ask) with a defined spread, although this spread can alter slightly depending on market liquidity conditions. The Rest of The World Nearly every European capital city has its own stock exchange, the largest of these being the London Stock Exchange or LSE. The LSE is home to large British companies such as Tesco and also multinational corporations who have listings on more than one exchange in the World such as HSBC for example. The Tokyo Stock Exchange is Asia’s largest exchange. It includes companies such as Sony Corporation and Konica Minolta Holdings, INC. The Tokyo Stock Exchange closed its trading floor in 1999 and realigned itself as an OTC exchange. David Thorpe is a senior contributor for www.passion-trading.com a free educational resource centre for traders and investors. The goal of the site is to stimulate the minds of its users, enabling them to achieve a greater understanding of the art of trading, thus helping them to become more profitable. |
Other Trading Tips Articles
Top 10 Retention Strategies: Save Money on Personnel Turnover It costs too much to recruit, hire, train, and develop new personnel. Retaining your best and brightest is worth your time and resources. Great retention strategies can also demonstrate your organization's care and concenrn for your loyal people and can add to their productivity.We gathered this Top 10 list from interviews with top level ...How To Make A Well-Balanced Investment Portfolio Getting a good investment portfolio is something that everyone needs who does any kind of investing. Having a good spread of investments is also a good idea, in the event that one area of investments takes a loss. Here are some tips about how to get an investment portfolio that is well balanced and should enable you to weather most storms. ...Trading in the Forex Requires Some Caution Whether it is in the millions or thousands, trading in the Forex is a bit risky. There are a lot of players involved and if you don’t arm yourself properly with knowledge about the Forex you may just get swamped.The Forex is the largest most vibrant market in the whole wide world. The financial world has never had a market that involves s ...Forex Currency Trading Systems Everybody wants to make quick money, and there is no other legitimate market like forex trading, where you can build a fortune, if you are lucky enough, in a matter of minutes or even seconds. Also, forex trading is a legitimate business, and there is no stigma attached with as there is with gambling, though practically speaking, trading in curr ...Deciding Between Long-Term and Short-Term Investments In an age when investments are more easily accessible by everyone, it can be difficult to decide what type of investment is best for your needs. Should you invest primarily in short-term investments that will yield results quickly, or would it be better to invest in long-term investments that will yield results farther down the road?Each ...Investing Wisely – The Way to Riches Multiply Your Money – Invest with CareThe investment in stock multiplies quickly. The certificates of deposits may give you interest rates ranging from 4 to 5% depending on the deposit period. Out of the interest that you receive, you have to pay income tax as if it is applicable to you.The invisible deduction on the interest comes ...Are Technical Indicators Such as the VIX a Reason to Get Involved with a Stock? Once in a while the technical indicators start making news. Whether it's the VIX, or a moving average, someone picks up the story and soon it's on CNBC or Bloomberg as the news of the day. So, as an investor one has to ask, "are technical indications really a reason to buy or sell?" In some respects the answer is no, since "investing" is somethi ...Planning a Single Parent Vacation With Your Kid More than most people, single parents need to look after their psychological and emotional well-being. Not only do the parents need it themselves, but more importantly, their children need it as well. A happy mom or dad makes a great parent. Similarly, a miserably busy dad or mom who can’t take care of his or her own personal emotional health wi ...Finding Low Cost Bonds If you've been considering investing in bonds, then you probably know that the best way to get the most out of bonds is to buy them early for a low price. Unfortunately, it can sometimes be quite difficult to find bonds early… and even when you do they're not always in the price range that you're looking for.Luckily, it is possible to fin ...Seecrets on Investment: Tired of Making Huge Losses in the Stock Market - Part 2 Fundamental analysis.Fundamentals analysis says the best way to predict the future trends of a stock is to understand the financial figures of the underlying company. The fundamental analyst would calculate a theoretical value of the company using cash flow analysis, recent dividends and earnings, future dividends and earnings projections ..."Over Reaction" and How It Hurts Us Traders The market has been called a perfect entity, where buyers and sellers even things out. Well to a certain extent that is actually true. But, before it "evens things out" it often overshoots the marks on both sides of the ledger. For instance let's say XYZ makes some big noise about an upcoming deal they are getting. Soon the market is going crazy ...Using Leverage to Your Best Advantage in the Stock Market Leverage is the ability to use a little bit of money to potentially make a large amount of money. For the past six years leverage has been used in the real estate market as lenders introduced new lending products such as zero down loans and Adjustable Rate Mortgages(ARMs) as well as through the use of option contracts. Leverage is also used to g ...Discount Hiking Gear Fortunately, companies offering great and excellent-quality hiking gear flood the market. And many companies provide high-quality gear at discounted rates, helping us to get good hiking gear at affordable prices.Hiking gear mainly consists of proper clothing, hiking boots or shoes, backpacks, tents, sleeping bags, sleeping pads, cookware, ...What is e-Commerce - Advantages and Drawbacks! Electronic Commerce or e-commerce is the trade of products and services by means of the Internet or other computer networks. E-commerce follows the same basic principles as traditional commerce that is, buyers and sellers come together to swap commodities for money. But rather than conducting business in the traditional way in shopping stores or ...Buy and Hold? The other day, there was a guy on CNBC hyping his style of investing. He seems like a nice guy, but his theory was a bit hard to swallow. He said that if you have money, you should just buy the market and average down. Hold it for ten years. Doing that he says will beat the market.We agree. It will beat the market. But that's not the same ...NFL Trading Deadline is Tuesday - Who Will be Traded? As usual there are several trade rumors going around. This year they mainly revolve around Randy Moss & the Oakland Raiders. Speculations are that there are two different teams with serious interest in aquiring Randy Moss from the Oakland Raiders. Which two teams could they be, well the front runners are the Arizona Cardinals, because of Denny G ...Part II of Day Traders and Swing Traders and Options? Maybe! Before every protective put trade it is possible to calculate your anticipated maximum loss. Use the formula: (stock price minus strike price) plus option price. For example, suppose you will pay $30.00 for your stock, and you want no more than a $3.50 loss on the position. Then you would choose the $27.50 strike put which ...Prevent Your Adsense Account From Getting Terminated Google, being the leader in search engines till now, is placing a high importance on the quality and relevancy of its search engines. Most especially now that the company is public property, Google has became seriously quality conscious regarding the results it displays.For this same reason, doing the wrong things in the Adsense and other ...
| 