There is an interesting reality about many people, and maybe even yourself. Many people do no have an understanding of what trading is. Many are totally clueless about what it consists of while many others see it as a form of gambling. Some people may have somewhat of an understanding but have no idea as to where to start. A common misconception is that only professional traders participate in it. Let’s help break down how the stock market really works, because to be honest with you, everyone can trade, yes even you as a working professional.
The Stock Market affects you whether you trade or not.
Yup, it’s true. Regardless of whether you trade or not, the stock market still has a hold on you and your money.
You hear about it on the news, on the radio and sometimes among friends and colleagues. You may have avoided it or tried to look into a few times, but still couldn’t grasp what it was really all about.
The market is very intricate and is a part of everything that you do.
Consider the following questions. How does a business go from being a small, family run company to a massive corporation making millions? Well, almost every large corporation started out as a small operation, which grew into a giant. Wal Mart started out as a single store in Arkansas. Michael Dell was selling computers out of his college dorm room. Even McDonalds used to be a small restaurant no one had even heard of. Today these companies make over 10 billion dollars (and counting) in profits combined.
All growing companies face one challenge: raising money to expand and grow. In order to do that, these small companies have two options. Borrow money from a bank or venture capitalist or selling a part of the business to investors and using the money for growth. This is where it gets interesting.
When a company sells a part of their business they are giving up a fraction of control for cash in an effort to expand the business. This money from investors does not have to be paid back and instead of paying investors cash, business owners sell their own stock. A share of stock is basically a share in the ownership of a company. As an investor or trader, you become a shareholder when you buy a part of the company. This means you are entitled to a fraction of the company’s assets and earnings. Assets include everything a company owns such a buildings, equipment and trademarks. Earnings include all of the money a company brings in from selling it products and services.
Where does all this buying and selling happen? Publicly traded companies are bought and sold on a stock exchange. An exchange is where buyers and sellers meet and decide on a price for a stock. This is similar to a flea market where buyers and sellers come together and agree on a price for a product. This is all done virtually, through a brokerage such as Questrade, which allows you to place these trades from anywhere you can find an internet connection.
The US stock exchanges include American Stock Exchange (AMEX), New York Stock Exchange (NYSE) and the National Association of Securities and Dealers (NASDAQ). You may also have heard of the DOW Jones, The S&P 500 and the NASDAQ composite. These are known as Market averages and they provide a general idea of how companies traded on the stock market are performing. The Dow Jones Industrial Average is the average value of 30 of the largest US companies. The S&P 500 is the average value of 500 of the largest US companies. These market averages tell traders about the general health of stock prices as a whole. If the economy is doing well, then the prices of stocks tend to rise together in what is known as a bull market. If the economy is not doing well, then the prices of stocks tend to drop together in what is called a bear market.
So what affects the stock market and all of these prices and averages? Simple. Everything around you. It all comes down to supply and demand which is affected by many thing such as company news and performance including news releases, earnings, profits, scandals and new products for example. Industry Performance including Technology or Pharmaceuticals also impact the overall stock market. Economic Factors such as interest rates, economic outlook, inflation/deflation, economic/political shocks, changes in economic policy and even currency. Investor sentiment also determines a bull market (general uptrend) or a bear market (general downtrend).
So now that you have the basics about the stock market, lets talk about the types of traders. There are three main types of traders including, scalp trader, day trader and swing trader. A scalp trader usually trades within seconds to minutes over a very short time frame. These traders buy and sell quick trades for quick scalps or gains. A day trader usually trades within a day trading a stock over the period of a day. A scalp trader usually trades over a longer time frame of days to weeks.
With a little bit of time, inspiration from MyStockLife and some self-determination, you too can learn how to trade.