Let’s briefly describe The Stock Market for those who are new to
financial world. What is The Stock Market? It is by definition a market in which shares of companies stocks are bought and sold. Let me explain this. When companies start growing they need to find investors willing to invest on company. They need to rise money to keep buying machines and products and to expand their businesses. At same time many investors want to find companies where they can invest their funds, so they can receive passive income from growth of those companies, which usually cause a growth on their portfolio of invested funds.
How is The Stock Market organized and why? Companies discovered a long time ago that most profitable, easy, fast and effective way to find investors is through an organized system, in which there is liquidity, and through which all interested individuals could bring in funds to keep developing their businesses and enterprises. That originated The Stock Market, which have been evolving and improving for a long time. People can trade and invest on this market through Exchanges. For example New York Stock Exchange, or American Stocks and Options Exchange. Exchanges are regulated agencies, which facilitate transactions between buyers and sellers and ensure fairness of each transaction for everyone. Stockbrokers also facilitate transactions for their clients and earn a commission for doing so.
What is difference between a trader and an investor? On this market like in many others you can be and investor or you can be a trader/speculator. Investors are corporations or individuals that want to invest an amount of money, usually a large amount, and keep on market for a while to profit from a long term trend. They want to grow their money, but they also want safe investments. They are not gamblers. They usually have large amounts of available funds so they can afford to leave their money on market for months and some times even many years (2-5 years and more). Traders and speculators usually want fast profits. They may or may not have large amounts of available funds for trading and even if they do, they don’t want to risk them too much. This is because traders usually take considerably higher risks than investors do. Many of them not only trade shares of stock, but also derivatives. I explain that bellow. To get bigger profits they incur in biggest risk. Many of them are those that want to become rich in a few months. They want higher than average results. In fact they want highest possible results. Many traders and speculators loose all their money on The Stock Market while others make fortunes. I think that knowledge, sound reasoning and common sense are three major factors affecting outcome of any financial decision that you make.
What are stocks, stock symbols and stock shares? The term stock usually refers to name of company or symbol. For example stock symbol for Microsoft Corporation is MSFT. When you want to check quotes or check graphics on your account you enter stock symbol and get all information. What are traded through exchanges are shares, shares of stock. A share is a piece of ownership. Think about this as a pizza where pizza is stock or company and every slice is a share. There are companies with millions and millions of shares, (slices) while others have less shares. When you buy, sell invest or trade, you are commonly dealing with companies shares. Usually if companies increase in value, you make money. If stock price rise you make money (If you have a long position, which means you bought shares). Other factors could affect your profits also like news, rumors and market sentiment. Do I need a stockbroker to become a trader or investor? You can seek advice of a license professional, a stockbroker, or you can trade by yourself using Internet. There is an increasing number of individuals that are investing and trading from comfort of their own house. To do it by yourself you will need to sign up with a brokerage firm like E*Trade or TD Warehouse or any other. There are many out there. You can choose which one fits your interests and your needs. Once you sign up and fund your account you can start trading for yourself. Although people often like to have a stockbroker make all trading for them.
What is volatility? I will define volatility in my own words. It is has to do with price fluctuations, how fast and often prices change. If stock price decreases and increases fast and too much in a short period of time, it is said to be very volatile – prices change too often, too fast and difference is big, so investment is risky. If opposite happens and prices almost don’t change at all, it is said to be a low volatile stock – if there are not sudden and unexpected price changes, then investment is less risky. Traders usually prefer volatile stocks, because they seek to profit from sudden price changes in a short period of time. Investors prefer steady, slow but secure growth. They don’t like surprises very much.
