Get Started Trading #4
WHAT CAN YOU TRADE?
You want to make money. You want to get started trading in the stock market. Have you questioned what to trade and how to know a good deal from a bad one? How do you know what companies or stocks to look into? If you are looking for stock market basics, you are in the right place.
Inside this edition of Get Started Trading, we will help you answer these questions and provide you with great tools and resources.
Before choosing a company, you must first understand a stock. A stock is an individual share or piece of ownership of a company. When you purchase a stock or multiple stocks, you are purchasing part ownership and you are then called a “stockholder” because you own part of that company.
What are the benefits of owning shares or stocks in a company? Most simply, the stocks hold monetary value. If the value of the company rises, then the value of those stocks rise and you could then sell your share of the company for more than you paid and end up with a profit.
Another benefit to owning stock in a company is that some companies will pay dividends. Dividends are periodic profit payouts that all owners are entitled to. Not all companies will do this but if you own stock in one that does, you will get a portion of that profit distribution provided the company has had a profitable term.
WHICH AND WHY AND WHERE?
Which companies have stocks and why do they sell them? There are two types of companies, public and private, and they ALL have stocks. However, not ALL stocks are for sale.
- Private companies own their own stocks and do not sell them.
- Public companies are identified as those companies which DO sell their stocks publicly.
Selling shares publicly brings cash into a company. It helps them raise capital and offload risk from their initial investors. Giving shares as compensation is also an alternative way to pay their employees which cuts down on cash spent on labor. Lastly, selling stocks also offers outsiders the opportunity to take part in the business.
Today, around 4,000 – 5,000 companies in the Unites States are publicly traded. This number fluctuates fairly often because sometimes public companies doing well will decide to buy all of their stocks back from their stockholders and transition back into a private organization. Also, some private companies looking to raise capital may decide to become public.
Where you buy your stocks is completely up to you and depends on what you are interested in buying.
In the US, the Major Exchange options are:
- New York Stock Exchange (www.NYSE.com)
- NASDAQ (www.nasdaq.com)
- Chicago Board Options Exchange (www.cboe.com)
- CME Group (www.cmegroup.com)
Internationally, provided you are dealing with an internationally-able broker, some of the primary options are the Tokyo Stock Exchange, the London Stock Exchange, Hong Kong, Toronto, etc.
CHOOSING YOUR COMPANY
Choosing the companies you trade is ultimately a personal preference. A good starting point is to trade companies you believe in and avoid companies that you morally disagree with. If you are against tobacco or alcohol usage, we do not advise you hold part ownership in any company producing those products. You should, instead, look into companies you like because by owning a portion of a company’s stocks, you ARE a part of that company. Buy what you believe in.
Two other factors to consider when choosing a company to trade are trending and volume. We will discuss trending more later but volume is a key identifier. The volume of trades happening in any company shows the fluidity of the market for that stock. The best picks for trading in our opinion are usually companies trading over one million daily shares. Look to your charting software for this information.
Over The Counter stocks, or OTC, are often called penny stocks or pink sheets. These are usually too cheap to trade through the major Exchanges. You are, of course, free to trade any stocks you like. However, we stay away from these because they are not well regulated and tend to be much riskier and more volatile than the regulated stocks.
Also, to trade any stock, you need to know the ticker. A Ticker Symbol is an identifying set of letters for any company in the market. The ticker symbol tells the Exchange which stocks you are buying or selling. Tickers are anywhere from 1 – 5 letters and your broker can help you look these up.
An incredibly helpful tool in choosing a stock or company to trade is our very own TradeLyon charting software. This tool allows you to search stocks with nearly any criteria you are interested in, find up to date analysis, and get great ideas on new trades to look into!
You are now getting closer to putting cash in your jeans. Continue to follow this blog series for more stock market basics and if you are ready to dive in deeper, check out the resources available for higher learning at TradeSmart University.
Also, be sure to share this series about stock market basics with your spouse. Nothing says I love you like financial education but just in case the message is unclear, throw in a box of chocolates too.