The Basics of Stock Market Trading

• The volatility of stocks creates risk as well as opportunities for profit.chart background image by Stasys Eidiejus from Fotolia.com
  
  Investing in the stock market was once the sole province of the wealthy. However, financial education has improved and the widespread use of computers has made financial markets more accessible. While some people invest in stocks for the long term, others see more active trading as a means of income.
  
  

Equity

• Publicly traded companies issue common stock. The stock represents a distributed form of ownership and control. As such, stock is referred to as an equity instrument. This is to distinguish it from a debt instrument, like a bond. Stock usually pays dividends, distributions of the company's profits to the shareholders. Some investors purchase stock in the hopes that its price will rise and they will be able to realize a profit when they sell it. One of the attractive features of stock is that it allows ownership of the company to be mobile. A shareholder who wishes to give up ownership of his shares can simply sell them to someone who wants to obtain them.
  
  

Transactions

• The transfer of ownership of stock can take place on an individual basis, but it more typically occurs in stock markets. Within the context of a stock market, a buyer or seller for a given security can almost always be found in a short period of time. Virtually all modern markets are integrated with computer systems and networks, which often allow transactions to take place within seconds.
  
  

Brokers

• Stock markets have traditionally been accessed via stockbrokers. These professionals ensure that transactions are made according to applicable rules and laws and that the parties involved possess the needed securities and cash. With the improvement in telecommunications technology, many people now participate in the market directly via the Internet and online brokerages. Individuals vary in their levels of trading activity. Some are referred to as stock "investors" and others are called "traders." Investors typically purchase securities and hold them for years, selling only when they need the funds after retirement or using the stock to generate dividend income. Others participate in day trading, making hundreds or even thousands of trades per day, and often end the trading day in a wholly cash position.
  
  

Education

• To participate intelligently, which is to say profitably, you must educate yourself. Understanding corporate structure and financial principles and keeping abreast of the news is essential. A subject of special concern is "risk." Failing to fully understand the nature of risk and to quantify it with regard to your investment strategy and goals can be a costly experience. Fortunately, the material on all these subjects is widely available in books, on the Internet and via consultation with financial professionals.