Stock Market Basics by Better Trades
The stock market is the place where the trading of company stock and derivatives
takes place. The stock market facilitates the buying and selling of these investment
vehicles. Individuals and institutions create wealth by trading stocks and options
in the stock market.
Stocks, also known as equities, represent an ownership share in a company. Companies
have two ways to raise capital to fund their business ventures. One is by issuing debt
and the other is by issuing stock. The value of these equities will vary depending on
investor demand for the stock. Derivatives such as options also have value that varies
in relation to demand for company stock. Traders create profit and wealth by buying
and selling these securities.
The places where stocks are traded are also known as exchanges. Most countries have
at least one stock exchange. In the United States the stock market commonly refers
to four exchanges. These exchanges are the New York
Stock Exchange (NYSE), the National Association of Securities Dealers Automated
Quotations (NASDAQ), the American Stock Exchange (AMEX), and the Over the Counter
Bulletin Board (OTCBB). The NYSE and AMEX are physical exchanges where trading is
done by a method known as open outcry. The NASDAQ and OTCBB are not physical
locations and trading at these exchanges is done electronically.
In order to invest in the stock market one needs to learn stock and option trading.
BetterTrades has a stock option trading system and provides options trading education.
There are several key differences between stocks and options that must be
recognized before a trader can be successful. Not understanding the
differentiation can mean a financial setback, but such losses can be avoided
or lessened with proper education.
When a share of stock is purchased, it retains the current market value until
the owner decides to sell it or give it away, or until the company is out of
business. People have owned shares of stock in a company for decades,
collecting quarterly dividends and hoping the stock will increase in value for
the long term. It is the nation's oldest form of investing for the future.
Options have a time element involved. Much like a carton of milk has an
expiration date, options will expire worthless at a specific time, which is
known as expiration day. Unlike stock, which can be purchased in any number
of individual shares, options are sold in bundles of 100 shares and known as
contracts. If a trader buys five contracts of XYZ stock, they control 500
shares of the stock. Unlike stocks, which may be sold at any price, options
are sold at predetermined prices, known as strike prices. Buying an option
gives you the right, but not the obligation, to purchase the stock at a
per-share rate equal to the strike price before it expires.
In order to participate in stock market trading and options trading, an
individual must have a brokerage account. Traditional stock brokers, the ones
who offer advice and place your trades on your behalf, are still available
but charge a lot of money to provide their services. Most traders today use
online brokerage houses, which charge a smaller fee for allowing you to buy
stock or options, and which permit you to conduct the trades yourself. There
are dozens of online brokerage accounts available, with each having their own
special area of expertise. It's best to check around the web sites to examine
the transaction prices and the versatility that's available with each
individual brokerage house.
Being able to understand the history of
the American stock markets will enable a trader to ascertain the
importance of the stock market and
why they were formed. Anyone with an interest in
trading stocks will need to know the
advantages and disadvantages inherent in the transactions. Once you know
how to buy stocks and
how to short stock, it
becomes a simpler process. But it's always a good idea to consult a
glossary to solidify the knowledge base and ensure the proper thought process.