Stock Trading for Profit

How to Profit from Trading Stocks

To make money in stocks requires first, an understanding of how the stock market works, and second, a sound strategy for buying, selling or holding stock (as the case may be). Here is an outline of what a stock is, how the stock market functions, and most importantly, how to make money in stocks.

To begin with, stocks represent ownership stakes in a given company. When you buy stock, you are buying a bundle of rights and obligations which come with having equity in that company. A company issues equity to the public when it wants more capital (i.e. money) in order to fund it's various endeavors. In fact, companies have two main choices when it comes to raise funding: sell debt or sell equity. Selling debt means borrowing money, whereas selling equity means selling ownership stakes. Both have advantages and disadvantages, but one of the chief benefits of selling equity is that you don't have to pay back the money! Although, of course, your stock holders will expect you to increase shareholder value and perhaps distribute more generous dividends...

The "stock market" actually refers to all the stock exchanges where shares in companies may be traded. When it first issues stock to the public, a company chooses the stock exchange it wishes to be listed on. Most companies list on one exchange, although some very large corporations are listed on more than one exchange. This means that you can buy and sell stock in that company on each of those exchanges. Some of the major exchanges are the New York Stock Exchange, the Tokyo Stock Exchange and the London Stock Exchange.

Buying and selling shares involves contacting a stock broker and asking them to settle the trade on your behalf. In return for facilitating this transaction, they will take a commission - either a flat fee or a percentage of the value of the order. You can call a broker via telephone or simply place your order on their website (most broker's have websites to enable this).

Okay, so there you have some stock trading basics regarding the nature of stocks and the stock market... but how do you make money trading or investing in stocks? Well, in theory, the price of each share is indicative of the value of the company. As the fortunes of the company improve, the price should theoretically increase, and vice versa. If you buy stock in a company believing that it will become more successful over a given time frame, you should be able to sell your stock in the company when it's price has increased and make a capital gain. Alternatively, you may wish to hold on to your stock and keep it as a long-term asset, or rely on any dividend income.

That's the theory anyway, and it virtually sums up how many investors approach stock market investing. They look at a range of fundamental data - in particular financial data (e.g. sales, profits, debt level, growth and certain financial ratios) that relate to a given company, and choose whether or not to invest accordingly. Analyzing such data is known as "fundamental analysis".

People who trade stocks (as opposed to invest in them) - "traders" - take a much shorter-term view of the stock market. Over the short term, the stock market may not seem all that rational, with company share prices NOT seeming to indicate value at all. Short term movements in stock prices are effectively ruled more by the collective psychology of the market than corporate value.

Given the capriciousness of the stock market in the short term (i.e. minutes, hours, days and weeks), traders often prefer to use "technical analysis" - the art and science of evaluating price data - in order to issue trades. Technical analysts study price trends - depicted in charts - and draw conclusions about where the price might go next. Then they buy, sell or hold on that basis.

Depending on your objectives, financial resources, abilities and views about things, either a fundamental or technical approach may appeal to you more. However, there are also professionals who, after learning the various theories about how to trade stocks, also use both. Whatever approach someone uses, it's generally embodied in some kind of trading system.

A trading system is the systematic process used by a trader to govern how they trade. There are probably as many trading systems as there are traders, and plenty of books, home-study courses, seminars, etc that also claim to teach profitable trading strategies and systems. Indeed, many traders say that the most important determinant of being successful in trading is having - and sticking with - a tried-and-true system.

There's no question that it's possible to make money in stocks. It's also possible to lose - so it's a good idea to learn as much as you can about stock market investing and trading.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com