How To Make Money In Stocks
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 represents the general supply and demand for companies' stock. Companies "list" - or make their stock available for people to buy and sell - on various stock exchanges located around the world. Historically, stock exchanges were physical locations where representatives of people wanting to buy or sell stock dealt with each other to facilitate the various stock transactions. These days trading is facilitated by computer systems.
Unless you have the requisite license, 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.
To make money in stocks, you essentially need to buy a stock at one price, and sell it at a higher price. The increase in price is theoretically due to the increase in the value of the company, based on its financial performance.
"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.
"Traders" tend to have much shorter time horizons. They buy and sell within weeks, days and - in the case of day traders - hours or minutes. In such time periods the prices of stocks are much more volatile and tend not to reflect corporate value so much as market psychology.
Traders seek to use the short term volatility of the stock market to their advantage. They use "technical analysis" - analyzing trends and patterns in stock prices - in order to spot opportunities to profit on upward, downward and even sideways price movements.
You will generally find that fundamentalists and technicians are both ardent believers in their particular perspective on the stock market. Both will say that that their philosophy makes for the best trading systems.
While books with titles such as "stock trading for dummies" seek to de-mystify the trading systems used by traders, there are equally a range of rather complex trading systems. Many full-time, professional traders won't reveal their trading systems, while others readily sell their systems in home-study courses and the like. Your best bet is probably to test some different systems and then choose the one that works the best.
I hope this overview has given you an idea of how to trade stocks. There is certainly more to grasp, but at least you now have a foundation in how the stock market works.
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