Stock Trading: What it is, how it works, where to start

What are stocks

A stock, also known as equity, is a type of security that represents fractional ownership of a corporation. Units of stock are called "shares".

The owners of a private corporation issue stocks to raise funds to grow its business. Shareholders have a claim to the company’s assets and profits equal to how much stock they own.

For example, if a company has issued 10,000 shares of stock and a happy guy named Charlie owns 100 shares, then this happy Charlie would own and have a claim to 1% of the company's assets and earnings.

What factors move stock prices up and down

Stock prices fluctuate fundamentally due to the theory of supply and demand. However, there are many factors influencing the demand and supply for a particular stock. We try to understand those factors by fundamental analysis and technical analysis.

Fundamental factors

Fundamental factors refer to factors inside the company. At the basic level, you may look at these models:

1. EPS (earnings per share)
2. P/E ratio (price-to-earnings ratio)
3. PEG ratio (price/earnings-to-growth ratio)

Technical factors

Technical factors are the mix of external conditions that alter the supply of and demand for a company's stock, including the following: Fundamental factors refer to factors inside the company. At the basic level, you may look at these models:

1. Inflation
2. Economic growth
3. Market trends
4. Liquidity

What kinds of stocks are there

Stock typically takes the form of these two types: common and preferred.

1. Common stock entitles owners to vote at shareholders’ meetings and to receive dividends paid out by the corporation.
2. Preferred stock does not carry voting rights, but preferred stockholders receive dividend payments before any dividends can be issued to common stockholders.

What types of exchanges are there

Stocks are generally bought and sold through stock exchanges. 3 common types of exchanges can be found:

1. Auction exchanges:
   Brokers and traders communicate physically and verbally on the trading floor or pit to buy and sell securities. The New York Stock Exchange (NYSE) is the world's largest equities exchange.
2. Electronic exchanges:
   Trading takes place on an electronic platform without physical trading activity. The National Association of Securities Dealers (NASDAQ) is one of the world's leading electronic exchanges.
3. OTC exchanges:
   Over-the-counter (OTC) markets generally list small companies.

Why do people trade stocks

There are many advantages of trading stocks. Some big ones include:

1. The opportunity to gain potential profits
   Stock trading can bring potential profits if traders time the market correctly - buy low and sell high.
2. Hedging against inflation
   Inflation can impact your wealth. Since the returns of stock markets often significantly outpace the rate of inflation, stocks have been a good way to protect your wealth from inflation.
3. Diversification
   It’s smart to build a diversified portfolio and you can easily realise it by buying stocks from different industries.
4. The ability to gain regular dividends
   Many companies pay quarterly dividends to their investors. Dividend income can help supplement an investor's paycheck or retirement income.
5. The ability to start small
   With many online brokers, investors do not need to worry about the commissions or fees associated with traditional stock trading. They can be confident knowing how much their trade is costing them and start trading stocks with less than $100.

How to read a stock quote

A stock quote shows the price of a specific stock on an exchange, along with information about the stock. Below is an example of how to read a stock quote: