Stock Market Basics for New Investors
This is a very basic explanation of market and some of the basic terminology that will be used in later discussions, while some of this may seem trivial, it is important to grasp the concepts of selling, buying, stock prices, and short/ long positions.
So we will start with the basics.
Shares of stock are nothing more than a piece of paper that gives you ownership of the company.
There is finite number of shares.
So if a company has 10,000 shares and you own 1 share, then you own 1/10,000 of the company, if you own 5000 shares you own 1/2 the company.
One of the questions I get asked a lot is how stock prices are determined.
Mostly this is derived from the old adage of supply and demand.
When more people are selling than buying it drives the price down, and as more people are buying than selling it drives the price up.
Think of it like this if you have an apple stand with 10 apples, and 20 people want your them then you charge up to what the highest 10 people are willing to pay.
Likewise if you have 10 apples and only 2 people want them, you can't charge nearly as much.
I know this sounds like a really simple explanation, but that it is the way it works and stocks are no different.
Also keep in mind that these stock that you are pieces of paper that are attached to real companies.
If that company goes bankrupt or out of business then guess what...
your stock is worthless.
Now that you know how prices are derived.
Unless you use a buy a hold, or long term dollar cost averaging strategy, timing on entering the market is important, and which way you going to invest is equally important.
If you enter the market by buying when it it is at the top of strong resistance area, chances are you are not going to fair out so well, unless it breaks through the resistance area and then becomes support, but as an investor I would want to see some evidence of a breakthrough before I bought anything.
This seems to be getting into more of strategy, but the one thing I want you to understand is that timing is important.
Most new investors don't know that you can sell stock that you don't actually have.
What you are actually doing is borrowing them from the brokerage house.
So let us get back to the apple analogy.
Let say the prices are high you are getting $20 an apple, because everyone wants one.
So you sell 10 apples for $20 Now you have a credit of $200, BUT you have not paid for the apples yet.
You are now hoping the price of apples goes down.
Let's say it does and they are now $10, so you are happy with that and now pay for your apples at $10.
So you made a profit of $100.
The opposite holds true as well, the price of apples could go up and you already sold them for $20, but because the demand and price went up you bought them back $30, now you just lost $100.
You don't have to own the stock before you sell.
Now in some cases, certain stocks maybe hard to borrow, so you won't be able to sell first.
These stocks generally trade at low volumes, and you probably want to stay away from them anyway.
Volume is simply the number of shares bought and sold in a trading session.
If you sell before you buy this is known as a short position, and if you buy before you sell, this is known as a long position.
So if someone says they are short the market, they are hoping the prices go down, and if they are long, they are hoping the prices go up.
This should give you a basic understanding of the market and the terminology I will be using as I expand on investment strategies, and my market analysis in future articles.
So we will start with the basics.
Shares of stock are nothing more than a piece of paper that gives you ownership of the company.
There is finite number of shares.
So if a company has 10,000 shares and you own 1 share, then you own 1/10,000 of the company, if you own 5000 shares you own 1/2 the company.
One of the questions I get asked a lot is how stock prices are determined.
Mostly this is derived from the old adage of supply and demand.
When more people are selling than buying it drives the price down, and as more people are buying than selling it drives the price up.
Think of it like this if you have an apple stand with 10 apples, and 20 people want your them then you charge up to what the highest 10 people are willing to pay.
Likewise if you have 10 apples and only 2 people want them, you can't charge nearly as much.
I know this sounds like a really simple explanation, but that it is the way it works and stocks are no different.
Also keep in mind that these stock that you are pieces of paper that are attached to real companies.
If that company goes bankrupt or out of business then guess what...
your stock is worthless.
Now that you know how prices are derived.
Unless you use a buy a hold, or long term dollar cost averaging strategy, timing on entering the market is important, and which way you going to invest is equally important.
If you enter the market by buying when it it is at the top of strong resistance area, chances are you are not going to fair out so well, unless it breaks through the resistance area and then becomes support, but as an investor I would want to see some evidence of a breakthrough before I bought anything.
This seems to be getting into more of strategy, but the one thing I want you to understand is that timing is important.
Most new investors don't know that you can sell stock that you don't actually have.
What you are actually doing is borrowing them from the brokerage house.
So let us get back to the apple analogy.
Let say the prices are high you are getting $20 an apple, because everyone wants one.
So you sell 10 apples for $20 Now you have a credit of $200, BUT you have not paid for the apples yet.
You are now hoping the price of apples goes down.
Let's say it does and they are now $10, so you are happy with that and now pay for your apples at $10.
So you made a profit of $100.
The opposite holds true as well, the price of apples could go up and you already sold them for $20, but because the demand and price went up you bought them back $30, now you just lost $100.
You don't have to own the stock before you sell.
Now in some cases, certain stocks maybe hard to borrow, so you won't be able to sell first.
These stocks generally trade at low volumes, and you probably want to stay away from them anyway.
Volume is simply the number of shares bought and sold in a trading session.
If you sell before you buy this is known as a short position, and if you buy before you sell, this is known as a long position.
So if someone says they are short the market, they are hoping the prices go down, and if they are long, they are hoping the prices go up.
This should give you a basic understanding of the market and the terminology I will be using as I expand on investment strategies, and my market analysis in future articles.
