The Stock Market 101

Understanding The Stock Market



Getting rich in the stock market can be a very fun and exciting thought. The purpose of this article is to teach you about the stock market and provide some helpful advice. Before we get started we need to define the word "stock market".

The word stock simply refers to a supply. You may have a stock of T-shirts in your closet, or a stock of pencils in your desk. In the financial market, stock refers to a supply of money that a company has raised. This supply comes from people who have given the company money in the hope that the company will make their money grow.

A market is a public place where things are bought and sold. The term "stock market" refers to the business of buying and selling stock. The stock market is not a specific place, though some people use the term "Wall Street"—the main street in New York City's financial district—to refer to the U.S. stock market in general.



Why Do People Buy Stock

Owning stock in a company means owning part of that company. Each part is known as a share. If a company has issued 100 shares of stock, and you bought one, you own 1% of that company. People who own stock are called stockholders, or shareholders.

Stockholders hope the company will earn money as it grows. If a company earns money, the stockholders share the profits. Over time, people usually earn more from owning stock than from leaving money in the bank, buying bonds, or making other investments.

Now that we have the basics out the way, we will discuss and explain the basic terms of the stock market. It is vital that you learn as much as possible before ever buying your first share. First golden rule, "never treat or play the stock market like it is a hobby". Many investors make the mistake of just diving in.



Basic Terms

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

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

* Bull Market- 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 the stock market indexes.

* NASDAQ - This is a stock exchange consisting primarily of technology companies.

* Blue Chip - a common stock of a nationally known company whose value and dividends are reliable

* Bid - a formal proposal to buy a stock at a specified price

* Limit Order - buying a stock at a price you set

* Bond - a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money

* Stop Order - an order to a broker to sell (buy) when the price of a security falls (rises) to a designated level Commission Payment to a stock broker for bringing together (brokering) the buyer and the seller.

* P/E ratio - A valuation of a company's current share price compared to its share price earnings

* Common stock - The basic type of stock issued to stockholders of a corporation

* Corporation - an organization that is authorized by law to carry on an activity but treated as though it were a single person

* Dividend - that part of the earnings of a corporation that is distributed to its shareholders

* New York Stock Exchange - The largest and most prestigious stock exchange in the world.

* Volume - The number of shares bought and sold for the day

* Securities And Exchange Commission - Federal agency that reports to Congress and given responsibility for overseeing external financial reporting by publicly traded corporations.

* Selling short - Investors who sell shares they do not own - "borrows" them from a broker - and holding them in the hope of buying them back at a lower price and gaining a profit.

* Wall Street - A street in the city of Manhattan, New York where several major brokerage firms and stock exchanges are located.

* Head and Shoulders - A chart pattern in which there are three successive rallies which form the outline of a person's upper torso. This pattern is used to alert investors that a stock price could be headed for a fall.

* Offer - The price an investor can buy from the market, also called the ASK PRICE. PEG ratio - A stock's Price/Earnings ratio divided by its projected earnings growth rate.

* Share - any of the equal portions into which the capital stock of a corporation is divided and ownership of which is evidenced by a stock certificate

* Market Order - an order to a broker to sell or buy stocks or commodities at the prevailing market price

Before you ever buy your first share you must know these terms. As mentioned before, it is very important to know as much as possible about the stock market. Otherwise, you are simply gambling your money away. Second golden rule, "the more you know, the more you'll make".



What Affects The Stock Prices

* Layoffs

This is usually good for the company and its stock price because expenses will be reduced significantly and quickly. This should help increase earnings right away. It is not always a major warning sign; it could just be a reaction to a slower economy. It is one of the quickest ways a company can cut expenses if sales have not been meeting expectations.

* Store Closings

This event often causes the stock price to go up for the same reasons as layoffs. However, this is not always the case. Closing stores actually requires a lot of money, and the positive effects of it do not take place immediately. This could be a sign that the company is truly in trouble at the moment. They probably have lower sales and higher expenses than they want, possibly due to a slowdown in the industry or the overall economy. The good news is that their management is being pro-active about maintaining profitability. Unfortunately, the stock price may go down for the next few months.

* Firing of CEO or Company Official(s)

This may sound very negative at first, but it does show that the company's board of directors was bold enough to take drastic actions to help the company in the long run. The stock price could go up or down after this announcement, depending on the situation. In some cases this event could be a sign of corruption that reaches beyond these individuals and there could be more negative announcements to come.

* Market Scandals

Traders tend to frown upon corruption in the stock market. Mutual fund scandals that have occurred in the past few years and corporate corruption such as Enron are two such examples. If people cannot trust the stock market, why would they invest their hard-earned money in it? In these situations it is harder for the market to go up because there is a lower demand for stocks.