Stock Market Trading
How Does The Stock Market Work?
stock market day trading
The question arises: How does the stock market work?
What is stock?
Suppose you want to start a grocery business. Your net profit is $ 250,000 (income)-$200,000(expenses on supplies) = $50,000.
Your expenses remain unchanged. You think of expanding your business. Going by the present inputs, the total value of your business is $ 400,000(premises)+ $200,000(groceries)+$60,000 (profits)=$660,000. Since you are in the business of making money and your business is also making reasonable profits, you may price your business at say $1,000,000 when you invite shareholders in your business.
Stock or share, at its basic, is really that simple.
Stock Exchange
Selling shares in this case may not be easy.
So in order to facilitate the trading in shares of such big public companies, stock markets or stock exchanges were set up. We have the examples of New York Stock Exchange (NYSE), NASDAQ and American Stock Exchange. They are the supermarkets for buying and selling shares.
There are two types of stock exchanges, one is the physical stock exchange and the other is virtual stock exchange.
Physical stock exchange
New York Stock Exchange-NYSE– is an example of a physical stock exchange. Your stockbroker actually contacts these floor brokers at the NYSE to buy or sell your shares. Millions of shares are bought or sold daily.
Virtual stock exchange
The stock exchanges where online trading is carried out are called virtual stock exchanges.
Share prices
The prices of the shares or the stock are determined primarily by the supply and demand position of the stock in question.
If you are new to stock market trading, here are certain important points that you must bear in mind in order to make money rather than lose it.
1. You must understand the concept of Price to Earnings Ratio also called PE ratios in its true perspective. PE ratios are easy to calculate and this is precisely the reason why you read so much about them in the newspapers.
You must take care not to compare the PE ratios of companies from different industries since these companies work on different variables.
Even if you try to compare the PE ratio of the companies within the same industry, you still may not get the composite picture of their financial fundamentals and stock values.
2. The stock market is often compared with gambling and you are warned that you should be prepared to take high risks. This is false advice. Every business has its high risks as those in the stock market.
There are ways to make income in stock market while minimizing the risks.
Here are some don’ts:
- Do not invest more than you can easily afford to lose.
- Do not invest more than 10% of your investment in any one stock.
- Do not invest in more than 2 or 3 stocks in any industry.
- Do not buy your stock in one go, all at once. Buy your stocks over a certain span of time.
Here are some dos:
- Buy stocks which have had consistent and predictable earnings growth.
- Buy stocks whose growth rate is higher than the total inflation and interest rates.
- Use stop-loss order to limit your risks.
Also read about stock investment
