A Quick Lesson in Stock Trading Basics

Stock trading can oftentimes be a confusing point of financial disconnect because we don’t understand the theory or what’s behind the actions. For some people, trading stocks makes sense, much like breathing; it comes naturally. For the rest of us, stock trading seems to be a type of magical wizardry that happens with a wave of a hand in the middle of a crowded room. Suddenly you own a portion of a company and your financial success depends on how well they can make a profit. While that is somewhat accurate, let’s see if we can make a little more sense of the whole stock trading conundrum.

What are Stocks?

Stocks are the way a company builds investment capital. Basically, a company will trade shares of the company’s profitability in the future, for some investment capital right now. Both sides benefit from this transaction because the company gets unearned revenue and the stockholder not only gets dividends from future profits, but also gets a say in the direction of the company.

How do Stocks Trade?

There are two basic methods of stock trading; floor exchange and electronic exchange. While there is a big push to make everything electronic, floor trading is still the most widespread way to trade stocks. Both ways work under the same general premises, but they are a little different in how the transactions take place. Here is a simplified picture of how these trades work:

Floor exchange: When we think of floor trading, our minds usually head right to the movie theaters and visions of Wall Street. We imagine hundreds of people flailing frantically while shouting and gesturing to one another. It looks like this chaos is what makes the stock market function from day-to-day. You call your broker wanting to buy 100 shares of Widgets, Inc. Your broker calls the floor clerk, who knows exactly who is looking to sell 100 shares of Widgets, Inc. The two agree on a price for the sale. That price is communicated to you and later you receive a confirmation in the mail. You then officially own a piece of Widgets, Inc.

Electronic exchange: Electronic transactions take place in the same way, except buyers and sellers are matched up online and the communication takes place almost immediately. Your electronic broker facilitates the online trading by putting you one step closer to the actual trading floor. You are not personally trading on the floor of the stock exchange by yourself. You still need a broker to handle the actual transactions, because not everyone can have access to the heartbeat of the American economy; the stock market. Again, that stock, no matter how small, gives you a bit of ownership in the company.

Why Trade Stocks?

There are thousands of stock trades that happen daily and thousands of reasons for trading. Some people trade because they want to make a living, while others are just looking to make some extra investment income. Trading stocks is a great way to learn about how the government regulates commodities. It’s also an interesting way to learn how companies grow and develop. You may just get a kick out of owning a part of a particular company. Stock trading can be an enjoyable past-time, an additional source of income, or even a primary source of income if the investment pans out.

If you’re interested in learning more, this site is a great start. We’ll teach you how to invest and identify some great companies in our paid monthly service.

One last tip is paper trading to get a feel for everything. Test out how a couple of stocks would do by first investing imaginary money. Track your investment until you’re comfortable and understand what your pretend money is doing. Then you’ll be ready to make a move with a real broker and real money. Take it slow, watch closely, but most of all have fun.

By David Moore

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