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Trading Stocks and Shares

Updated on March 22, 2010

Trading Stocks and Shares

The world of trading stocks and shares can seem overwhelming at first due to the sheer volume of available investment options, as well as the plethora of investment information that’s constantly being funneled to us through financial news channels, websites, and so forth. It’s important for us to understand how to distinguish between what is “white noise” versus actual signal, especially since we’re talking about putting our hard-earned money to work for us. For that very reason, probably the first rule of all rules would be a very simple statement: Don’t invest in anything that you don’t understand. That may seem like an elementary concept, but all you have to do is look at the history of our major financial meltdowns in this country, and you’ll see that many of them were brought to their tipping point by people investing heavily in financial instruments (i.e., junk bonds, flimsy internet stocks, mortgage-backed securities, sub-prime paper, etc.) that they didn’t fully understand, and they were not fully aware of all the potential ramifications of those types of instruments. Thorough analysis is necessary in order to invest in stocks that will truly produce the rate of return that many people seek. It is important to point out that the terms “trading stocks” and “trading shares” are pretty much synonymous, because when you trade stocks, you are literally trading the shares of those stocks. For those who may not yet be fully initiated into the world of investment jargon, a “share” of a stock is basically a piece of the company that you own. That share represents a relative percentage of the company’s value. As I talked about in my hub entitled "Stock Trading Explained", a share is like one piece of a jigsaw puzzle, and the entire sum total of all available shares of a company equal (roughly) what the company is worth. This is known as the company’s “market cap”, or market capitalization.

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

Trading Stocks and Shares: In Summary

So trading stocks and shares really boils down to understanding what companies are viable and worth trading versus which ones to stay far away from. Some people are content with trading only the “blue chip” stocks, which are basically the major heavy-hitters in the business world such as Fortune 500 companies and so forth. These stocks are characterized (usually, although the recent economic woes have changed that) by a high price per share, and a general understanding that these stocks have stood the test of time and are considered to be longer-term, value-driven investments. But then there’s a whole other side of stock trading—one that I have engaged in many, many times—and that is the smaller stocks, or “small cap/micro cap” stocks (i.e., stocks with a smaller market capitalization). Before you even begin to start trading micro cap stocks, you would do good to analyze your current financial condition and apply a healthy dose of research before you even begin to go that route. The lure of trading micro cap stocks is that basically it’s a lot cheaper to do, but let me tell you—without the proper market education, discipline, and trading plan, it can turn out to be just as expensive as buying 100 shares of Berkshire Hathaway (look it up to see what I’m talking about). The most common way (nowadays anyway) to start trading stocks and shares is through opening up an online brokerage account (i.e., TD Ameritrade, Scottrade, E-Trade, Zecco, etc.), depositing your initial trading capital into that account, and then actually start the process of purchasing your stocks online through their various order screens. Most online brokerages have plenty of tools and resources on their sites to help you make the most informed decision about which stocks and shares you should trade. I personally recommend TDAmeritrade because I have an account with them, but in all fairness I can’t judge the other online stock brokerages because I’ve never used them. I’ve been with TDAmeritrade since 2001 and they’ve done me right so far. Anyway, before I drift off into all kinds of personal opinions, I did want to reemphasize that you have to really do your homework before jumping into trading stocks and shares. Don’t be in a rush…do extensive research and be patient, and it can truly save you hundreds of hours and thousands of dollars in the long run.

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