Welcome to the next lesson in my First Year Trading Educational Series. Here, I’m taking trading all the way back to the basics and keeping things as simple as humanly possible. Because that’s how I believe trading should be kept. For the rest of the lessons in the series, click here.
Like I said in the last lesson, we’re going way, way WAY back to beginning here, folks. Back to basics. To give newbie traders a complete understanding of what goes on in the markets.
And if you are going to be trading the stock market then I do believe it is important that you know exactly WHAT you are trading. In this case that would be stocks.
So What Exactly Is A Stock?
Stock in a company is a very simple idea to understand and it has everything to do with a company wanting to raise money for operations.
To raise that money, publicly traded companies offer you, the potential buyer, ownership in the company. They do this by trading shares of their company on the stock exchanges. These shares of ownership are called stocks.
Here’s what a share of Apple Stock $AAPL looks like:
If you buy a share of AAPL, this is what you are technically getting. This share of stock says that you have part ownership in Apple Computers.
If you are long AAPL and the price of AAPL increases, you can sell your share of stock and keep the difference between your purchase price and your sale price. Of course, you can also lose money on this transaction if the value of this share drops after you buy it.
So how do you value a stock? Some traders/investors use a fundamental approach which analyzes a company’s financial statements, its management and competitive advantages, and its competitors and markets.
The other approach is to examine a company’s historical price chart and use pattern analysis and/or technical indicators to determine the value. This approach is called technical analysis. We’ll be discussing both of these methods in a future lesson.
Three Types Of Stock
When it comes to trading stock, there are three types of stock a company issues. These are common stock, preferred stock and unlisted stock.
Common Stock: This is the stock that most traders are buying and selling on the major stock exchanges. Common stock gives the shareholder an active interest in a company’s earnings and dividends, along with voting rights. If the company were to go bankrupt or liquidate, the common shareholder is one of the last creditors to be paid.
Preferred Stock: This type of stock stock grants the holder priority over common stock holders in terms of dividends and bankruptcy claims, but has no voting rights. The price of preferred stock is usually higher than common stock due to its different rights and privileges.
Unlisted Stock: Unlisted stocks are not listed on any stock exchange and may be common, or preferred and they are bought directly from the issuer of the stocks.
So there you have it, now you know exactly what you are buying when you buy stocks on the major stock exchanges. You are buying ownership in the companies you are trading and the price of that ownership fluctuates based on many factors, including fundamental and technical.
Stay tuned for the next lesson!