STOCK MARKET BASICS
YOU NEED TO KNOW!
Welcome to the second article in your quick, simple and FREE guide to get started trading in the stock market. To get your jump start on trading in the stock market, you need to know the key market players and their roles. Let’s dive right in!
The first and most important player in the stock market is YOU! YOU ARE THE TRADER.
There are a few different types of traders in the market.
- Institutional traders are corporations and big funds.
- Big individual investors are people like Warren Buffet.
- Retail traders are people like you and me.
All three types of traders make money the same way: through buying and selling stocks.
The primary differentiator between the three is merely the volume of stocks they buy and sell and the amount of cash they have in the system.
Your most important job as a trader is to analyze your trades and to pick the direction of the stocks.
To get started trading in the stock market with actual dollars, you’ll first need to set up your trading account with a broker. Sometimes you can get started with an account for as little as $500 but $2-3,000 is a much better launching point.
Brokers are the people who bring your trade to the market. A broker is your connection to the market. He or she gets paid by the trader through commissions from your trades.
Brokers can be classified as “full-service brokers” or “discount internet brokers”.
The full-service brokers might be considered a little old school these days and they aren’t usually required. Most traders will use a discount internet broker like eTrade or Scott Trade.
TradeSmart University does not have an official broker and we do not get paid to endorse any brokers. However, to help get you started, here are some brokers that we like.
- OptionsXpress (www.optionsxpress.com)
- Think or Swim (www.thinkorswim.com)
- TradeKing (www.tradeking.com)
- TradeStation (www.tradestation.com)
- Questrade – for our Canadian audience (www.questrade.com)
The next key player in the stock market that you’ll need to know is the Market Maker. Market makers provide liquidity to the market. They are the players who make sure that the trades are happening.
Market Makers offer both a buy price and a sell price on stocks at any given time to ensure as best they can that there is always something to trade
The Market Maker makes sure the market happens! They make money from the difference between the price to buy and the price to sell. This is known as the Bid/Ask spread. For example. If stock XYZ is Selling for $100 (Bid), but it costs $101 to buy it (Ask), the market maker keeps that $1 difference.
Also, the Market Makers will adjust prices on trades in order to attract buyers and sellers to them. This is one reason for fluctuation in the market.
The final key player in the stock market is the Exchange. The Exchange is exactly as it sounds. It is the central hub or gathering place for the trade action or exchanges to take place.
These days, this is primarily an electronic process. The Exchange makes money by charging fees to companies in “exchange” for having their company stocks listed.
An extension of the Exchange is the Clearing House. The Clearing House extension of the Exchange is a vital piece of the stock market. The Clearing House is like the “bank” of the market. Every trade that happens must pass through the Clearing House. It records and balances the books for every single transaction.
To sum up the market process: You, the trader, make a decision on a trade and bring that to your broker who then brings it to the market makers. Then, the actual trade takes place within the Exchange and is processed through the Clearing House.
Now you know the key players in the stock market and their roles. Since you know who plays, you are now ready to learn HOW to play!
Stay tuned for the rest of this blog series to learn more about the basics of trading. Or, if you are ready for deeper knowledge on how to make money by trading the stock market, check out www.tradesmartu.com for resources. They can get you playing with winning trades quickly!
*Also remember to share this blog series with your friends who always ask for loans. If you help them get rich, then you’ll be increasing your odds of getting them to pay you back!