Guide to the stock market: The basics

Guide to the Stock Market: The Basics.

The stock market is the place you go to buy and sell stocks, except you don’t actually go there to do it. The only way to buy and sell stocks is through a broker who is licensed to trade stocks on the exchanges that list them. The two largest venues in the United States are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). These transactions can be initiated in person, by mail, by telephone, or through online brokerage services.

A share of stock grants you fractional ownership in the company that issues that stock. It entitles you to your share of profits, losses, and dividends that the company generates through normal operations. If a company is successful and increases its business reach and product lines, you can expect to benefit through a rise in the market value of its stock. Conversely, if the company is having problems and suffers a loss of sales, the likely outcome is a decline in the stock price. Many larger, established companies that have predictable revenues and cash flows elect to reward their shareholders with dividend payments. Newer companies that are focused on growth and expansion usually won’t pay a dividend until such time as their balance sheets support it.

Since the advent of the internet, online trading stock market investing has become hugely popular. To take advantage of this investment option, the first step is to open a brokerage account with one of the online brokers. This will require a cash deposit which will be available to you when you decide to purchase online stocks. Once the account is set up, you will be able to buy and sell stocks and bonds as well as most mutual funds.

Before you begin trading, it’s important to understand the risks associated with owning stocks. Unlike some investments such as bank deposits, the money that you place in the stock market is not insured and there is no guarantee that you will make money. Stocks can decrease in value just as easily as they can increase, so it’s important to research prospective purchases first. There are various services, both online and in print, that offer stock market tips for a paid fee. In addition, many brokers have their own research staffs that focus on uncovering stock market secrets exclusively for their clients. For someone that is new to stock market trading, a full service broker that provides a wide range of trading services and research options is a prudent selection.

It’s also possible to leverage your investment potential by buying stocks on margin. Basically, this allows you to borrow money from your broker to buy stocks while using those same stocks as collateral for the loan. In accordance with federal regulations, all brokers must place limits on the amount of margin that can be used to buy stocks. This is due to the fact that there is always the risk that the stocks could lose value, which jeopardizes the collateral used to secure the loan. The margin borrower is still liable for the loan whether the stock goes up or down, so it’s important that this risk be recognized and assessed before using margin on your account.

There are essentially two types of stock market strategies: long-term and short-term. The long-term investor, utilizing a “buy and hold” philosophy, buys for the long run since the market has historically demonstrated a steady rate of return for those who patiently invest their money over time. They have been rewarded by not panicking whenever the market starts fluctuating wildly as a result of world events. The short-term investor attempts to time the market by buying at depressed prices and selling on rallies whenever they occur. Whether you use one or both of these approaches, it’s important to know what you are doing before risking your hard-earned cash.