The first step is to understand the stock market. A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you considered as the part owner of the company.
You will have the right to vote on members of the board of directors and other significant matters before the company. If the company distributes profits to shareholders, you are expected to receive a proportionate share.
One of the exceptional features of stock ownership is the notion of limited liability. If the company loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes insignificant. However the creditors can’t come after your personal assets. This is not necessarily true in the case of private-held companies.
There are two types of stock:
- Common stock
- Preferred stock
The majority of the stock held by individuals is common stock.
Common stock corresponds to the majority of stock held by the public. It has voting rights as well as right to share in dividends. When you hear or read about “stocks” price swinging up or down, it always refers to “common stock”.
Regardless of its name, preferred stock has fewer rights than common stock, but in one important area which is dividends. Companies that issue preferred stocks generally pay consistent dividends and preferred stock always has first call on dividends over common stock.
Investors buy preferred stock for its current income from dividends, so always find for companies that make big profits to use preferred stock to return some of those profits via dividends.
Another advantage of common stocks is that they are highly liquid for the most part. Small and/or obscure companies may not trade regularly, except for most of the larger companies’ trade daily creating an opportunity to buy or sell shares. In the stock markets, you can buy or sell shares of most publicly traded companies approximately any day the markets are open.
Stock Market Trading
Stock market trading consists of buying and selling of company stocks and as well as stock derivatives. This type of trading usually takes place in a stock exchange, in which companies need to be listed in order for their shares to be bought and sold. This trading market provides with substantial earnings potential and is one among the most popular investment options.
How Does Stock Market Trading Work?
Stock market trading is normally done by brokers. As a result, the first step is to seek a reliable investment broker. Stock market trading occurs at a physical stock exchange, where buyers and sellers of company shares meet and agree on the price at which the transactions would materialize.
Conventional stock trading entails an investor placing an order for a specific number of shares of a company with his/her broker present in the physical stock market. The broker forwards the order to the floor clerk, who then attempts to locate a trader desire to sell those shares. Bids are then exchanged. The transaction closes only after the buyer agrees on the price quoted by the seller. This technique is also called “open outcry,” because it involves traders crying out their bids.
Stock market trading will also takes place online. This procedure is much quicker and less complicated than trading in the physical stock market. Online stock market trading engrosses the real time placement of buying and selling orders for stocks. The transaction is accomplished when the trading system is capable to match bids and a confirmation is received.
Benefits of Stock Market Trading
The benefits of stock market trading are:
1. It promotes economic growth.
2. It helps companies raise capital and handle financial issues.
3. It ensures that money is invested in businesses to enhance profit potential.
4. It helps investors realize substantial profits.
Drawbacks of Stock Market Trading:
1. It proposes lower leverage than other forms of trading, such as Forex trading.
2. The short selling of stocks is hard, because stock prices do not appreciate significantly in a short span of time. Accordingly, there is a wait period before you can book healthy profits.
3. It is traded for limited hours in a day.
Trade = Buy or Sell
To “trade” means to buy and sell in the language of the financial markets. How a system that can accommodate one billion shares trading in a single day works is an anonymous to the majority people. No doubt, our financial markets are wonder of technological efficiency.
You don’t require knowing all of the technical details of how you buy and sell stocks; though it is significant to have a basic understanding of how the markets work.
Two Basic Methods
There are two basic ways exchanges carry out a trade:
· On the exchange floor
When the market is open, you see thousands of people rushing about shouting and signaling to one another, talking on phones, watching monitors, and entering data into terminals. It could not look any more disorganized.
However, at the end of the day, the markets workout all the trades and get prepared for the next day. Here is a step-by-step walk through the implementation of a simple trade on the BSE.
· Tell your broker to buy 100 shares of a particular company at market.
· Your broker’s order department sends the order to their respective floor clerk on the exchange.
· The floor clerk alerts one of the firm’s floor traders who get another floor trader willing to sell 100 shares of that company. This is easier than is sounds, since the floor trader knows which floor traders make markets in particular stocks.
· The two will agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the closing price. The process may take a few minutes or longer depending on the stock and the kind of market. A few days later on, you will receive the confirmation notice in the mail.
Of course, this instance was a simple trade, complex trades and large blocks of stocks involve considerable additional detail.
In this swift moving world, some are wondering how long a human-based system like the BSE can continue to provide the level of service required.
The electronic markets use immense computer networks to match buyers and sellers, instead of human brokers. While this system not has the romantic and exciting images of the BSE floor, still it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so on, wish this method of trading.
For the individual investor, you regularly can get almost instant confirmations on your trades, if that is essential to you. It also smooths the progress of further control of online investing by putting you one step closer to the market.