Stock Trading Basics

Stock trading, to the newcomer, may seem like a confusing web of terms and back-and-forth information. Buy or sell? Cash dividends? Earnings per share? Junk bonds? Yet, once broken down, the basis of stock trading is not too complicated. Depending on one's involvement and research, it can be somewhat stressful, but always exciting, especially when an investment succeeds.

Stock trading, and hence the stock market, is essentially a giant auction. A "share" of stock is a piece of a company. These pieces are called shares because they share a proportion of the profit or loss. This proportion is determined by the total number of shares that make up the company - 1,000 total shares means that each individual share earns (or loses) 1/1,000 of the company's earnings (or losses) after taxes.

When asked to describe stock trading, most people would probably recount a story about a hectic trade floor, with brokers and clerks running back and forth to make deals. In reality, most trading today is done electronically. Electronic trades do not carry the same perception of excitement as floor trading, but they are much faster and more efficient. This efficiency results in near instantaneous updates, both on an investor's trades and on the market itself.

Stock trading does get much deeper and more complex, with stock splits and liquidity and after-hours trading, but the main thing to remember is that the various stock markets are simply large auctions. Though there are rare exceptions, successful investors do not buy or sell based on a whim. "Beating the market" is a phrase that gets used frequently, but it's something of a misnomer. Deals and trades are carefully made based on data, research, and agreements, though even the most well-researched trades can be subject to some level of chance.