Learning Stock Market Basics

by Alexis A. on 2010-07-031

I’ve always held a fascination for investments and online stock trading ever since I watched Trading Places with Eddie Murphy and Dan Aykroyd. I watch the ticker run across the bottom of the screen on the all day news channels and vigorously read columns like the Motley Fool. But those articles on the Dow Jones Industrial Average and NASDAQ, stocks and bonds, options and Forex might as well be written in Latin for all I know.

I mean, I get the basics. Buy low and sell high to make a profit, but how do you know when low is really low? And what about when to sell? I actually thought about taking a job with Edward Jones for a while just so they could teach me what it all meant, but I was just too chicken to go.

Learning Stock Market Basics

So, here I am. Still just as lost as ever, but ready to dive head first into the basics of how the stock market works and learning how to “do it myself” when it comes to buying and selling stocks. If that little smart aleck baby on the ETrade commercials can do it, then so can I. And I’m hoping that my adventures through the tangled web of investing will get some laughs, spark some debate, and even teach you something you might not have known before. For those of you who are in the same boat as I am, welcome aboard. For those of you who left me far in the dust years ago and made your fortune on Wall Street, please feel free to drop in and leave a few hints, tips and tricks of the trade.

If you’d like to learn about the stock market with me, then hop on board! I hope you enjoy.

The Stock Market & The eBay Analogy

While few of us have actively traded on the stock market, most of us have bought something at auction on eBay. The item that you are looking to buy or sell is a certificate of stock, or a sliver of ownership in a company. The stock market is like the auction block and the brokers are like the auctioneers. When you find a stock you like, you click on the BID NOW button (theoretically speaking) and enter the amount you wish to pay for the item. The stock broker immediately sends your bid through to the seller of the stock. If the price is right, meaning that the seller likes the price you’ve submitted, he’ll sell you the stock. Your brokerage account is debited for the amount you bid and the number of stocks you bought is recorded into your portfolio. You are now the proud owner of your own little slice of AT&T, IBM, Apple or whoever you just bought stock for.

Now, let’s say that the seller rebuffed your offer based on the fact that he’s gotten higher offers from other bidders — in a way, you’ve just been outbid. You have the opportunity to raise your offer and submit. Once again, if the seller likes your price, he’ll sell. If not, he’ll refuse and sell to someone else.

That’s it in a nutshell. This same process is carried out over and over again five days a week, for however many hours the stock exchanges are open. If you’re lucky, you’ll get your little slice of heaven when the price is relatively low and when value rises, you can then become the seller and make a nice little profit off of selling your stock.

What Is a Stock?

A stock signifies that the buyer now has a vested interest in the company as an owner. Of course, the more stock you own, the more of the company you own and therefore the more influential you are to the company. The price of a stock is determined by the simplest foundation of economics — supply and demand.

Let’s take a simple example. Think of a share of stock like a DVD. The better the movie is on the DVD, the more people want to own that DVD and the fewer there are available on the open market. Because of the scarcity of the DVD, the more the seller will offer it for, since there are fewer places someone can go to buy it.

On the flip side, let’s say that all the hype surrounding a particular DVD was just wrong. The movie stunk. The people who scrambled to buy the DVD have now seen the movie and are highly unhappy with the contents of the disc. Suddenly, they are selling them to anyone who’s interested. In an effort to unload the DVDs, they drop the price in order to entice people to purchase them. People who haven’t seen the movie yet but who are intrigued by the lowered price will start buying them up, decreasing the number of discs available to the public; at some point the price begins to increase again based on demand. And this is how pricing for the item gets determined.

This is how the stock market works (in fact, it’s how any type of market works). Stocks are bought and sold on the stock exchange, which works much like the eBay auction block. The more copies of the stock that are available for sale, the lower the price is for buyers; on the flip side, fewer copies will typically raise prices.

Of course, this is just a simple analogy about pricing and the law of supply and demand in the marketplace. Other factors can play into the big picture and things can become a bit more complicated, but such discussions are for another time.

Where To Get Free Stock Market Education

If you’re interested in learning more about stock investing for free, check out your friendly neighborhood cheap stock brokerage. By becoming an account holder (which costs you nothing), you can peruse their investment resources that range from informative material and training videos to sophisticated investment tools aimed to make you a better investor. Here is a list of places where you can find free investment educational materials.

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{ 1 comment… read it below or add one }

Echo September 28, 2010 at 9:27 am

I think it’s common for many investors to jump into active trading without completely understanding how the market works. Even something like how the Dow Jones Industrial Average is actually calculated. I haven’t seen that explained very well on many financial websites.

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