Trading Stocks for Profit

Interested in trading and investing in stocks? Well, the first step is to understand some stock trading basics. In this article we'll take a look at what stock market investing and trading involve, and how investors and traders make money from 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.

While people often talk about "the stock market" they are usually referring to either a particular (physical) stock exchange where companies' shares are available to trade... or the sum total of the world's stock exchanges. In other words, if someone claims to trade the stock market, they may be referring to the general principle of trading stocks, or they may be referring to trading shares on a specific stock exchange. Stock exchanges can be large or small, depending on how many companies are listed, and the value of their share capital. The major stock exchanges are the Tokyo Stock Exchange, Bombay Stock Exchange, London Stock Exchange, Frankfurt Stock Exchange, Shanghai Stock Exchange and the New York Stock Exchange.

When you buy or sell stock, you need to go through a stock broker. They take a fee or commission in return for facilitating the trade. Pre-Internet you generally needed to call up brokers to place your orders; now you can issue a buy or sell order by filling in a form on one of the numerous online brokerages.

How to trade stocks comes down to your goals, financial wherewithal, skills and beliefs. In theory, the price of any company's stock reflects its value. If you're confident that the value of that company will increase, then so too, should the value of your stock. You can then sell the stock for a profit... or hang on to it. (You might hang on to it if you think the company will continue to do well in the future, or because some generous dividends are on the way, or because your stake is such that you can borrow against it for other investment purposes.)

"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.

People who trade stocks (as opposed to invest in them) - "traders" - take a much shorter-term view of the stock market. Over the short term, the stock market may not seem all that rational, with company share prices NOT seeming to indicate value at all. Short term movements in stock prices are effectively ruled more by the collective psychology of the market than corporate value.

Traders therefore often opt for a "technical" approach to the stock market. They use technical analysis, which involves analyzing and modeling price data, to inform their trading activity.

Depending on your objectives, financial resources, abilities and views about things, either a fundamental or technical approach may appeal to you more. However, there are also professionals who, after learning the various theories about how to trade stocks, also use both. Whatever approach someone uses, it's generally embodied in some kind of trading system.

Trading systems can vary widely. Essentially, a trading system is the step-by-step approach used by a trader to make money in stocks. While there are general approaches to trading e.g. trend following, candlestick charting and others, any given trading system is likely to be tailored by the trader to suit themselves.

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.

Mark Crisp is an experienced stock trader and the creator of the Momentum Stock Trading System which focuses on big moves for big profits. Click here to get your complimentary copy of The Seven Habits of a Successful Trader from http://www.crispstocks.com

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