When you think of trading, stock trading is the sector of the financial market which is most likely to come to mind. It is immense in size, and is of significant importance to the economy. What’s more important for traders is that participating in it can also result in significant profits. This is because it is the backbone on which most companies rise and fall. Most companies get their start almost entirely in thanks to investor contributions. Without it, many of the important movers and shakers in the world would not exist today. So, what is the stock market, and how does it work?
The stock market is where people trade company stocks or shares. The stocks represent something close to a partial ownership of a company. Basically, although you do not own any real assets with the stock, having the stock gives you some real advantages we will discuss later.
Releasing a stock into the market
Stocks do not come out of thin air, however. What happens is that companies release new stocks over a very short amount of time. They also offer an Initial Public Offering (IPO) to give traders an idea of what the stock price may be. The traders then buy up the stocks, usually quite quickly, which is how the companies receive their funding. After this, however, traders cannot really sell stock back to a company (unless the company wants the stocks back, of course). Neither do the stocks expire. Instead, traders have to exchange the stocks between each other to make profits from their investments. The prices of the stocks vary depending on how people view the company. This depends on their profits, if people view the company positively, and the economy in general. However, this is not the only benefit of owning stocks.
Benefits of owning a stock
Although the primary method of making profits with stocks is by trading them, there are plenty of other positive aspects. After all, the companies want to incentivise people to buy them. However, these benefits differ depending on the type of stock in question. They come in two varieties, either common stock, or preferred stock.
With both common and preferred stocks, companies pay out dividends to their investors. This means that they make small payments to them. However, there is a difference between dividends in the two stock varieties. Preferred stock owners get a fixed rate of dividends, and are often higher. Common stock owners’ dividends vary depending on what a company’s profits have been over a certain period.
Preferred stocks in stock trading
Preferred stock owners also get certain privileges when a company’s bankruptcy may come to fruition. A court would rule owners of these stocks as priorities for paying off with assets in this situation. So, they are more likely to gain recompensation under such a situation.
Common stocks in stock trading
Common stock owners, however, have voting rights over a company’s decisions. They get a proportional vote depending on how many stocks they own in comparison to all the stocks available. This decision could be, for example, choosing a new CEO for the company. Furthermore, these types of stocks can be either A stocks or B stocks, if the company offers these options. A stocks allow for a greater proportion of votes when the time comes.
What’s more, common stocks have more potential for profit. As a company becomes more profitable, the common stocks are the ones that tend to increase in price. The stockholders can, therefore, sell these for more and also potentially gain higher dividends. Additionally, the company will divulge more of its earnings information to stockholders.
Therefore, the main difference between preferred and common stocks is that, while the first may offer more stability, the latter offers potentially greater profits.
Stock trading indicators
All traders have to figure out how worthwhile a company and stock is before making a trade. This involves keeping a close eye on both technical and fundamental analysis. In case you do not know, technical analysis involves looking at charts for the price history of a stock. What traders look for here is chart patterns to see how the past history of a stock can affect its future price. Fundamental analysis is a bit more big picture. With fundamental analysis, traders view the underlying factors that could affect the price of a stock. This could be the earnings reports, any news about a company, legislation that could affect its business, etc. You want to be certain that a company will be on the up. Here are some of the most essential indicators you should keep an eye out for.
The revenue of a company informs people of the profits they make before taking expenses into account. If you want a more well-rounded picture of a company’s profits, you need their net income. This states both the expenses and income of a company, thus showing the bottom line.
Some further, more esoteric, indicators would be the Earnings per Share (EPS) and Price-to-Earnings Ratio (P/E). The EPS is a more reliable indicator for traders, as it shows how much profit the company has made relative to all shares. This gives investors a more accurate depiction of just how much profit they have made. The P/E indicator a stock’s price with its EPS. It compares the relative performance of a stock over time.
Form 10-K and 10-Q are two reports that companies need to publish, by law. The first of these is annual, and the latter is quarterly. Both of these financial statements offer records of balance sheets, revenues, expenses, and the sources of these transfers.
Finally, most traders should be keeping a close eye on the company itself. What is its business model? Is this model viable in the long-term? Furthermore, is the product they offer of value to the public at large? Is their particular financial sector doing well? Has the company or any of its members been involved in any scandals? These are all just some of the sort of questions any trader should be asking themselves when analysing a company. The most important thing they should keep in mind is the public perception of the company. The public will be the people who consume the company’s service or product. Therefore, they bring profit to the company.