Each stock represents the equity or ownership of one small part of companys capital. Companies sell stocks in order to gain enough funds for their business effort. Stocks can bring dividend payments to their owner, if the companys doing well, and they can be bought and sold on the stocks exchange. People in United States have lots of misconceptions about stock trading, which are rooted in the public mind since the Dot.com Bubble burst.
Stock trading comes with certain amount of risk, and everyone should know about it before entering the game. These risks are hard to calculate, or even explain sometimes, but in this article well try to sum up some of the basics that every trader should know before investing money into stock market.
This is a very complex place, where stocks of publicly-traded companies are being bought and sold. There are two types of stock markets primary and secondary one. Primary stock market is the one where stocks are issued and sold for the first time, while secondary market deals with buying and selling stocks that are already in business.
Stock markets work on adversarial basis, because investors who want to sell stocks need to find the ones who are ready to buy them. This way only one side of the deal can gain profits depending on the stock performance in the future.
High Variability of Stock Prices
High variability of stock prices is exactly what makes this market interesting. There are thousands of different factors that can influence stock prices and traders need to consider as much as possible to successfully predict the future stocks performance and market trends. Some of these factors are: media campaigns, supply and demand, natural disasters, political decisions, opinions of bigger investors, number of buyers and sellers etc. To get familiar with all these new trends on the market, traders need to closely follow all stock news available, and always be well informed.
Two most important question when trading on stock market are When to get in? and When to get out?. When trying to answer these question investors need to consider three separate issues:
- Stocks Fair Value – Calculating stocks fair value is one of the most important processes that traders need to do, because by comparing this value with the current price of a stock they can determine if current price is a bargain or a rip off. There are many ways to calculate the fair value of the stock that range from counting values of all assets that one company has, and deducting all of its liabilities, to calculating the intrinsic value of the companys future earnings.
- Event That Causes Downturn – Traders need to predict the time when triggering event thatll cause a stock prices drop is going to happen.
- Decision-Making Process of Other Traders – As we mentioned earlier, stock market works on adversarial basis, which makes the behavior of opponent investors crucial for determining the future price of stocks. To predict things like that, traders need to closely inspect the decision making process of their opponents and to determine the patterns that they use for their purchases.
The bottom line is that the stock exchanges are very complicated places and to grasp all the information thats needed for successful stock trading, people need to make huge effort and learn as much as possible, about stock market rules and trends, before they start investing.