Learn to Trade Stocks

The stock market was once a playground for the rich. But today's technology gives us computers, the internet and a wealth of financial information from media sources, such as CNBC and other TV programs, and newspapers including The Wall Street Journal and Investor's Business Daily. Because of this, the interest in the stock market has reached new heights, and the average person can easily become market savvy. Every investment portfolio includes a mix of stocks, and many individuals use their home computers to buy and sell stocks online. Once a person understands the basics of trading stocks, he can do his own research into companies he'd like to invest in. Much of the research can be done online, with up-to-date information. TV, the Internet, and daily newspapers bring stock investing within the reach of everyone. Online discount brokerages make buying and selling stocks quick, easy and affordable, with commission fees as low as $5 and $10.

Companies use stocks to raise money. They could take loans when they need money, but by issuing stock they don't have to pay the money back or make interest payments, as they would if they had a loan. Companies issue "shares" of stock, which are small sums of money that make up their total capital. People share in the company's value by purchasing "shares" of stock, and they become "shareholders" or "stockholders". People purchase shares of stock in companies they believe are good companies that have the potential to be profitable and grow. Stockholders will share in the company's profits by the value of their shares increasing in price. Of course, if the outlook for a company wanes, the value of the stock may decrease. Since stockholders are actually part owners of the company, they have voting rights when the board of directors holds elections or puts certain questions up for vote.

Shares of stocks are bought and sold on "stock exchanges". Stockbrokers are members of exchanges, and they receive a small commission when shares of stocks are bought or sold. Stock exchanges were created to provide a convenient place where stock transactions can take place. The largest exchanges in the United States are the New York Stock Exchange, The American Stock Exchange, and NASDAQ.

As a company increases profits, the value of its shares may increase. Stockholders share in this financial gain. Another way stockholders can gain from their stock holdings is by receiving dividends, or small amounts of money that the companies give from their profits. The dividend amount is based on each share. A dividend may pay 3 cents per share, so a stockholder who has 100 shares would receive $3.00. Dividends may be issued regularly (monthly, quarterly, yearly) or at the discretion of the company's board of directors. Some companies do not give dividends, but instead re-invest profits into building the company.

When you put your money in a certificate of deposit at your local bank, a savings account, or a money market fund, your principle is safe. The depositor will receive interest on the principle. However, the rate of interest is usually very low, because the risk is low. Investing in stocks offers the opportunity of getting a much higher return on investment, but there is an increase in risk. It's possible that there will be little or no increase in the value of a stock. Worse yet, the principle is at risk, and part or all of it can be lost. Therefore, money that is needed for running a household should never be put at risk in the stock market. One hedge against loss is to become as knowledgeable as possible about the stock market and about the specific companies you consider buying shares in. That said, historically stocks have returned about 10% to 12% per year on average. Be advised that past performance does not guarantee future results.

The price of a stock's shares changes daily, sometimes minute by minute during the trading day. There are many forces at work that drive stock prices, supply and demand being one of them. When more people want to buy a stock than want to sell it, the stock price moves up. When more people want to sell than buy, the price falls. One of the factors that affects a stock's price is its "earnings". Quarterly, publicly traded companies are required by law to report their earnings. Stock analysts make projections about a company's future earnings potential, and these sentiments can cause a stock's price to change.

Stocks are typically bought and sold using a broker. Brokers are available in "brick and mortar" offices and also on the Internet. Full service brokers charge more for transactions, but they can offer expert advice. Discount brokers can't give personal service, but individuals can buy and sell stocks on their own quickly and cheaply from their computer. It's up to you to do the research to find the stocks you want to invest in. You should have an exit plan to determine when to sell the stock, and know this before you even buy it. Have a price amount in mind when you will "pull the plug" and sell a stock, should it begin to make major declines. It is important to cut you losses on stocks that take a significant turn for the worse, and don't have any positive prospects for recovery in the near future. Making emotional decisions to buy and sell stocks can get you into trouble, so have a well thought-out plan. A stock will have two prices, a "bid" and "ask" price. The "ask" price is the price you pay to buy one share of stock. The "bid" price is the price you would receive for selling one share.

The financial page of a newspaper gives listings of stocks and their fundamental information at the end of the trading day. Here are the column heads and explanations:
52W high, 52W low - Over the past year (the last 52 weeks), these are the highest and lowest prices per share that the stock reached.
Stock - This is the name of the company.
Ticker - Each company has one or more letters representing the stock.
Div - If the company pays a dividend, this will be the annual payment per share.
% Yield - is the percentage return on the dividend, computed by dividing the annual dividends per share by the price per share.
P/E - The price to earnings ratio divides the current stock price by the earnings per share from the last four quarters.
Vol - The volume, or the number of shares traded that day.
High/Low/Close - During the trading day, this is the highest, the lowest, and the closing price per share.
Net chg - This is the change in stock price of today's close compared to the close of the last trading day. It can be positive or negative.
Trading stocks can be fun and profitable, made especially easy thanks to today's technology. But learn as much as you can about the companies you plan to buy stocks in, monitor them daily, and don't invest money that you can't afford to lose.