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Nature of Stock Trading

Stock General Info

The word stock simply refers to a supply. You may have a stock of T-shirts in your closet, or a stock of pencils in your desk. In the financial market, stock refers to a supply of money that a company has raised. This supply comes from people who have given the company money in the hope that the company will make their money grow.

A market is a public place where things are bought and sold. The term “stock market” refers to the business of buying and selling stock. The stock market is not a specific place, though some people use the term “Wall Street”—the main street in New York Citys financial district—to refer to the U.S. stock market in general.

Why Companies Issue Stock?

If a company wants to grow—maybe build more factories, hire more people, or develop new products—it needs money. It could get a loan from a bank. But then it would owe money. By issuing stock, a company can raise money without going into debt. People who buy the stock are giving the company the money it needs to grow.

Not every company can issue stock. A business owned by one person (a proprietorship) or a few people (a partnership) cannot issue stock. Only a business corporation can issue stock. A corporation has a special legal status. Like a school, its existence does not depend on the people who run it. Under the law it is separate from the people associated with it, and has special legal rights and responsibilities as well as its own unique name.

Why People Buy Stock?

Owning stock in a company means owning part of that company. Each part is known as a share. If a company has issued 100 shares of stock, and you bought one, you own 1% of that company. People who own stock are called stockholders, or shareholders.

Stockholders hope the company will earn money as it grows. If a company earns money, the stockholders share the profits. Over time, people usually earn more from owning stock than from leaving money in the bank, buying bonds, or making other investments.

One Man, 5,000 Votes?

Stockholders in a company usually have voting rights. They vote on such issues as who will be elected to the board of directors—the group of people who oversee company decisions—and whether to buy other companies. Stockholders typically have one vote for each share they own. Every vote counts, but a stockholder with 5,000 shares will have more influence on the company than someone with only one share.

Most companies have annual meetings, where stockholders cast votes and ask questions of the companys leaders. If they cannot attend, stockholders may use an absentee ballot to vote. Shareholders also receive quarterly and annual reports that tell them how the company is doing.

What Goes Up Earns Bucks

When the price of a particular stock rises, that stock is said to be “up,” meaning up in price. When the price falls, the stock is said to have gone “down.” The terms “up” and “down” are also used to describe the rise and fall of the market as a whole.

As a company makes money, the value of its stock goes up. For instance, pretend you bought some shares of stock for $10 each. Since you share the companys profits, if it does well the shares might later be worth $15 each. You could then sell your stock and make $5 on each share. If the company loses money, however, you would also share its losses. Those $10 shares might each be worth $3 if the company fell on hard times.

Those Funny Fractions

In April 2002, all stock exchanges in the U.S. began trading their stocks in dollars and cents.
For instance, the price of a particular stock might go up $1.10. This means that the price of a stock increased $1.10 over its previous price. If a share of stock had been worth $10, it would now be worth $11.10.

This is different from the earlier system, when stocks were traded in fractions based on 1/8th. If a stock worth $10 went up 1 and 5/8ths, it meant that the stock had risen $1 plus 5/8ths of a dollar in price, or a total of $1.62. In other words, if each share had been worth $10 previously, it would now be worth $11.62.

But why divide each dollar into eighths when it could simply be divided into hundredths—a hundred pennies, to be exact? Its because the U.S. dollar is a relatively new kind of currency. When the stock market opened at the end of the eighteenth century, prices were based on the Spanish dollar, which is divided into eighths.

Bears and Bulls

Bears are cautious animals who dont like to move too fast. Bulls are bold animals who might charge right ahead. An investor is said to be “bearish” if he or she believes the stock market will go down. A “bearish” investor will buy stock cautiously. A “bullish” investor believes the market will go up. He or she will charge ahead and put more money into the market. An investor can be bearish or bullish about a particular kind of stock.Likewise, the term “bear market” describes a time when stock prices have been falling on the whole. A “bull market” is a period when stock prices are generally rising.

Types of Positions

There are two types of positions when trading on the markets -long and short. They dont refer to the time you have spent after youve opened one, rather if you are buying or selling. Taking a long position means you are buying stock with the intention to sell it later, after it has gained, and earn through the price difference. Other terms that are often used as synonyms are: long side trading, trading on the long side of the market, going long the market etc.

Taking a short position means you are betting that prices will drop and you are selling. Basically, when going into a short position, you borrow stocks, currencies, commodities etc. from a broker and you sell them on the market. Later, you have the obligation to return what you have borrowed by buying it from the open market and you will profit if prices have dropped. The idea is you sell something you have borrowed now for a certain amount of money and you later refund the broker by buying the same thing for less.

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