Monday, November 14, 2011

Learn To Use The Stock Market

Using the stock market is a GREAT way to make money. But beware, it is also a great way to lose money.  The stock market is no doubt risky, but it can yield greater profit than almost anything else, but also greater losses.  The stock market also takes time.  It is no get rich quick scheme unless you start off with a large loan, invest it, and get very lucky. Not something I'd suggest doing unless you want to spend most of your life in debt.

Before you begin to look at the stock market there are some basic terms you need to know.  These stock market terms will be used every day and are basics in using the market.

  • Ask – This is the lowest price that a seller will accept when selling a stock.

  • Bear – This refers to an investor who believes the stock market or a particular stock is declining. This is the opposite of a Bull.

  • Bid – This is the highest price that a buyer is willing to pay for a stock.

  • Broker – A person that buys or sells stocks, bonds, commodities and such in exchange for a fee which is called a commission.

  • Bull – An investor who believes the whole market or one individual stock is going to increase in price. This is the opposite of a Bear.

  • Dow Jones Industrial Average – This is a compilation of the 30 most traded blue chip stocks. This list is the most widely used for analyzing stock market indexes.

  • NASDAQ – This is a stock exchange consisting primarily of technology companies.

  • Stock – This is the smallest measurable unit of ownership in a company. Shares fall into either the common or preferred categories; companies issue shares of stock in order to raise capital without borrowing money.

  • Limit- This is a type of buy or sell. If you set a limit buy for a stock that is currently 25.55 and you set the limit buy for 25.00, the computer will auto buy the stock at that point and if it never reaches that point you will not buy the stock. Same with a limit sell. If you bought a stock at 25.00 and want to auto sell it at 29.00, that's where you put the limit sell, (you can put a max and a min so if it goes to low it also auto sells), and it will not sell until it hits that point.
  • Share- One single share in a company would be 1 share in a stock. So if it was priced 25.00, you would have 1 share for 25.00. If you bought two shares, it would be 50.00. And each share is affected by the increase and decrease in the stock value.
  • Portfolio- Your portfolio is all the stocks you own and how many shares of each.
 Other Stock Market Terms

Investing terms – These words and phrases reflect stock market terms for various stock market strategies. These stock market terms are used to describe specific conditions or analysis.
  • Blue Chip – This term describes a company with a history of strong earning, traditionally increasing dividends and an outstanding balance sheet. Blue Chip stocks include Exxon-Mobile, Coca-Cola and Wal-Mart.

  • Book Value - This is the value of a company if assets and common stock equity are added together and all liabilities are subtracted. There is little correlation between the book value and the market value. Book value is used in such fundamental analysis measurements as Price to Book ratio.

  • Dividend – This is the portion of a company’s profit that is given back to the investors. Such payments are made on either an annual or quarterly basis.

  • Market Capitalization – A company's market capitalization, also known as its market cap, is calculated by taking the number of outstanding shares of stock multiplied by the current price per share.

  • P/E Ratio – This widely used analysis tool of Price to Earnings ratio measures now you pay for each dollar of corporate earnings. For example, if you have $30 stocks that report a profit of $2 per share, your P/E ratio is 15; $30 per share divided by $2 earnings per share equals 15. In this ratio the lower the P/E ratio, the better.

  • Spread: This stock market term reflects the difference between the Ask and the Bid. 

  • Yield – This is the percentage of a dividend paid against the stock price.  For example, if you receive a $3 dividend on a $30 per share stock, your yield is 10%.

Now to get to the actual fun part. Using it.  You can kind of think of the stock market as a game. A very expensive, risky, game. But a game nonetheless. My suggestion would be to play around in a simulation for at least 1 month before you even think about investing real money.  will provide you will a "similar" simulation to the real stock market. You will get 1 Million dollars in fake money to invest and it follows the real stock market changes. But you do not have to pay for orders such as you do in real life, what you do in the simulation does not affect the real market such as you do in real life, and you probably aren't reading this blog if you have $1 million. After you play around in the game, select a certain amount of money that you would use in REAL life and only use that much to play in the game. So if you only want to try investing $800, see how well you do with just that much, it makes it more realistic.

After you have decided you've had enough play time, let's get to the real market. First things first.
  1. Set up an account with Etrade, ScottTrade, or AmeriTrade, research which one you want and what is better. Basically, Google it.
After setting up an account and knowing how to use the account, (there are tutorials on whichever trading site you use and I am not going to type out each tutorial), next comes the hard part.


Researching a stock (Average about 2 weeks everyday) before you buy it is crucial.  Look at it's trends, ups and downs, latest news, what other investors think of it and especially recent quarter results (How much profit, net value, etc.)
  • Make sure you know everything about this stock before you get involved.  You want to lose that money you invest? Didn't think so. Then research.

A tip is to not invest in high priced stock companies such as Apple and Google when you begin. This is because one single share can cost upwards of $400. They can and do fluctuate $10 a day but with only one share you are likely to only make or lose $20. It honestly isn't worth your time. Find stocks under $25 at the least for a beginner.

This is just a short summary on how to get involved in the stock market so here is one last tip. Diversify. This means have multiple different stocks in your portfolio.  The reasoning behind this is because that way if ONE stock does bad, which most likely it will, the others that are doing good will make up for it. If you are buying only one stock, and it does bad, sorry, you are outta luck. So diversify your portfolio.

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