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A share of stock represents a tiny share of ownership in a company. When you Buy shares of stock, you are becoming a part owner in the company and are entitled to a share of its assets and earnings. In other words, you are buying equity in the company.
There are two basic kinds of stock:
Common stock is the kind most investors own. When you own common stock, you generally receive voting rights, and you receive dividends if and when the company's board of directors decides to pay them. If the company were to be sold, common stockholders would have the right to a share of the value of the company's assets?that is, if any are left after the company pays off creditors, bond holders, and owners of preferred stock.
Preferred stock is called "preferred" for that reason?its owners have a prior claim to the company's assets over the owners of common stock. Preferred stock usually doesn't include voting rights, and it pays a fixed dividend. As a result, while preferred stock pays off in a predictable manner, its holders do not share in the company's changing fortunes in the way common stockholders do. For that reason, most investors don?t prefer preferred stock!
There are two ways to make money with stocks.
- Many stocks pay dividends, or shares of the companies' profits that shareholders receive as income.
- You can also make money off fluctuations in the stock's market value, if you can Sell it at a higher price than you paid for it.
Before investors Buy stock, the company first sells, or offers it. The company arranges with investment bankers to purchase its securities and Sell them to the general public. This arena is called the primary market. The issuing company receives capital (money) from the sale.
In the secondary market, stocks are sold to investors. In a secondary market transaction, money is not received by the issuing company, but exchanged between investors.
Secondary market trading happens on exchanges and over the counter.
The New York Stock Exchange is an example of a place where traders come to Buy and Sell stock. Exchanges are regulated by exchange boards that decide which companies can list their stock and that make rules about how the stocks are traded. Stocks are sold at open auction at the exchanges, so everyone knows which stocks are selling and what their current selling prices are.
In the over-the-counter (OTC) market, stocks are not auctioned. Their sale is negotiated directly between brokers and buyers.
Often the stocks of new companies and companies that can't get listed on an exchange are traded this way. The NASDAQ is a computer network that keeps traders up to date on the trading of OTC stocks.
Stock traders want to Buy stocks when their values are low and Sell when their values are high. The distinguishing characteristic of stocks is their potential to change in value in ways that can be hard to predict.
A stock that is likely to have great or fast changes in its value is called volatile. Volatility gives stocks the capacity to have high returns if values rise, but it can also make stocks a risky investment if you can't Sell them before they fall.
Volatility is a major key to investment strategy.
Blue chip stocks, a term for the stocks of older, well-established companies with strong track records, tend to have low volatility.
They are likely to pay dividends and to grow steadily, if slowly, in value. Because of their low volatility, you often have to hold these stocks a long time to enjoy large value gains.
Highly volatile stocks?for instance, those of new companies in hot industries?have appeal to short-term investors. They watch for stocks that they think they can Buy at low prices and Sell relatively soon when the values grow. They have no real way to be sure this will happen, however, so while volatile stocks have the potential for high and fast returns, they also present a greater risk of losing your money.
Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward.
During this time, economic production is strong and jobs are plentiful. Inflation is low.
Bear markets are the opposite?stock prices are falling, and the view is that they will continue falling.
The economy also slows down, and unemployment and inflation rise. In either scenario, people invest as though the trend will continue.
Investors who think and act as though the market will start to rise or keep on rising are bullish, while those who think it will start to fall or continue falling are bearish.
A good knowledge of Japanese Candlesticks patterns provide various bullish and bearish patterns that make you help money in both the bull and the bear markets.
They are partly a result of the supply and demand for securities. Investor psychology, government?s intervention in trying to control the economic activity, and changes in economic conditions also drive the market up or down.
These forces combine to make investors bid higher and higher (or lower and lower) prices for stocks.
To qualify as a bull or bear market, a market must have been moving in its current direction (by about 20 percent of its value) for a sustained period. Small short-term movements lasting days do not qualify; they may only indicate corrections or short-lived movements. Bulls and bears signify long movements of significant proportion.
A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Often investors attempt to Buy securities as they demonstrate a strong and steady rise and Sell them as the market begins a strong move downward.
Successful investing in bear markets can involve many different strategies. Some investors try to secure their assets in less volatile securities such as fixed-income bonds or money market securities. Others wait for the downward trend of prices to subside.
When it does, they begin buying. Still others seek to take advantage of the falling prices. When the market goes down, portfolios with a greater percentage of bonds and cash fare well because their returns are fixed. Many financial advisors emphasize the value of fixed income and cash equivalent investments during market downturns.
There are many investment methods that seasoned investment professionals use to take advantage of opportunities during bull or bear markets. Methods such as dollar cost averaging, selling short, and diversification exist. Understanding well-founded strategies will help you to improve your chances for superior performance in either market environment. However, there is no surefire way to always succeed. The best weapon you can employ is education. To begin your educational journey, you can refer to the specific tutorials on each of the bolded terms above. Do your homework!
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