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Stock Trading Explained

Updated on August 21, 2009

Stock Trading Explained

It’s not the easiest thing in the world to have stock trading explained with any type of brief document such as this hubpage, but I’m going to give it a shot. I’ll go ahead and put this disclaimer out there: I know for a fact that I’m not going to cover the totality of all the different nuances and aspects of stock trading, including the different stock exchanges, the bid/ask spread, selling short versus going long, valuation of stocks, technical analysis trading techniques, or other more specific topics; my aim is to introduce to a rank beginner, hopefully in terms that he/she can easily understand, what stock trading is generally about. So, with that in mind, let’s dig in. First of all, it would be important to understand what a stock even is in order to understand why people trade them, right? Well, a “share” of stock is basically a piece of a company. If you can picture in your mind one of those huge jigsaw puzzles with 5,000 pieces or whatever, just imagine in your mind that the puzzle represents a company of some kind. Now, each piece of the puzzle would be a “share” of the company. I know that there are technical nuances to this, such as how many shares are offered for public trade versus kept for high-level insiders that have ownership stakes in the company, but to simplify the explanation, all of the shares of stock basically add up to what the company is worth in total value, also known as its “market capitalization”. Market capitalization simply means the total value of a company in terms of assets, sales, revenue, etc., and the shares of a company’s stock are supposed to be a good representation of the company’s market capitalization. When you buy a share (or multiple shares) of a company’s stock, you are essentially buying a “piece” of that company. The people who own the most shares of the company’s stock also have the highest share of ownership in that company. A person who owns shares of a company’s stock is called a “shareholder”, or sometimes “stakeholder” (because they have a stake in the company). I remember reading one time that Warren Buffet has an 8% ownership stake in Coca-Cola—that simply means that he has bought enough Coca-Cola stock to own about 8% of the total value of the company. Now as to the validity of that Buffet claim, I’m not too sure; I don’t know if he still owns the shares or whatever, but nonetheless it was good for this example.

Image courtesy of Microsoft Office Clip Art
Image courtesy of Microsoft Office Clip Art

Stock Trading: An Example

When you buy shares of a stock, you are now considered to be (to one degree or another) an “investor”, because you have invested your own money into that company. Basically, the companies use that money to continue to grow their businesses (that’s what they all claim, anyway) through equipment purchases, increased advertising campaigns, and other business-building activities. Now, each share of stock is worth a certain amount of money. For ease of math, let’s say that XYZ Company has shares of stock worth $10.00 a share. If I were to buy 100 shares of that stock, I would have to put up $1,000.00 in order to buy those shares. But, once I buy them, I am now sitting with an investment worth $1,000.00. This per-share value is not a static thing; it changes based on market conditions and the public’s perception of the company’s value, so the price-per-share of your stock will always fluctuate. You may buy the stock at $10.00 per share, but then next week a negative press release comes out about the company, and the value of the shares may drop to only $5.00 per share. Then, your investment, those same 100 shares, are now only worth $500.00 total. So, in effect, you have “lost” $500.00, but that doesn’t actually take effect until you physically sell the stock. The drop in value is considered to be a “paper loss”, meaning that the loss is not realized until you actually sell the stock. But anyway, long story short, the process of buying and selling stocks for (hopefully) a profit is called stock trading. For instance, let’s say that those same 100 shares of XYZ Corporation end up skyrocketing in value, and are now worth $50.00 per share. You’re sitting pretty with an investment that’s now worth $5,000.00, which is basically 5 times what you paid for the stock. This may be a good time to sell your stock and exit the market with a $4,000.00 profit. So, you put an order in with your broker to sell the stock. I guess it would be important to mention here that all stocks are traded through institutions known as “stock exchanges”, which is basically a big open marketplace where stocks are bought and sold. Some of the more famous stock exchanges are the New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ). You can only buy stocks through brokers who are affiliated with these stock exchanges. But once you put the order in to sell the stock, the stock is sold in the open market (the stock exchange), and you exit the market having earned some decent coin. Again, many investors make a living out of buying stocks at one price and then turning around and selling them for a higher price. This is, in a nutshell, stock trading explained. As I said before, I’m definitely not covering all (or even half) of what can be covered where trading stocks is concerned, but at least this can provide a very general overview for the beginning or aspiring investor.

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    • SteadyHubs profile imageAUTHOR

      SteadyHubs 

      8 years ago from Georgia, USA

      @ scheng1: True indeed...so many traders lose their heads when they don't respect the leverage involved in the markets.

      @ Steve Nichols: I really appreciate the feedback!

    • profile image

      Steve Nichols 

      8 years ago

      Nice overall explanation of stock trading. Resources like this hub are essential to the beginning trader.

    • profile image

      scheng1 

      8 years ago

      "aspiring investor" is a nice term. Many aspiring investors become speculators in stock market when greed takes over reasoning power.

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