Stock Trading Fundamentals
Stock Trading Fundamentals
By Mark Crisp
To make money in stocks requires first, an understanding of how the stock market works, and second, a sound strategy for buying, selling or holding stock (as the case may be). Here is an outline of what a stock is, how the stock market functions, and most importantly, how to make money in 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.
Companies seek to sell their stock to the public by listing on a stock exchange. Following their initial public offering of stock or “IPO”, the shares of public companies can be bought and sold on that exchange. There are numerous stock exchanges around the world and they all make up what we call the “stock market”.
If you want to trade stocks you need to place orders to buy or sell with a stock broker. Stock brokers make money by taking a flat fee or a commission based on the value of the trade. In most cases, you can place orders for trades on the Internet, via a stock broker’s Internet site.
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.
Short term traders, on the other hand, dismiss the utility of fundamental information. Because their time horizon for trading is much shorter - often varying from a matter of hours to a few days, sometimes longer - they see a market that is much more volatile. Within hours, days, weeks or even months, the stock price of a company may not only vary widely, but also bear little resemblance to the company’s financial performance.
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.
