Monday, December 12, 2005

Stock Market: A New World

If you decided to keep up-to-date with my blog, I wish you the best of luck on this new adventure that we are taking.

First off, in the next few posts I will talk about 3 VERY important issues that make the stock market what it is today. Those three things are as follows-

  • Buy Low, Sell High
  • Fear and Greed
  • Supply and Demand

Like I said, these hot topics determine what the stock market does. But before we get into technicals of how the market operates, lets learn what a stock the stock market is.

When you buy "stock," you are buying a small fraction of ownership in a company. Seriously. But when i say small, i mean small. There are companies that have over hundreds of millions of shares, to only a few hundered thousand. You buy stock in hopes of making money through the company(s) you invested in.

Of course buying ownership (stock) in a company costs money. Where do you supply the money? Through a stock broker. There are many brokers out there, and it all depends on how much time, money, and effort you want to spend on investing. You can have companies invest your money for you or learn the ropes of the stock market and take investing into your own hands. I decided to take my own money into my own hands. My broker is Scottrade, and they charge $7 every time you buy and sell a stock. So, to profit at all you must earn more than your commision prices (being $14 total). Other brokers charge more and less for their services. For example, Ameritrade, another broker charges about $11 every transaction. Totalling $22 before any profits! Ameritrade has a good reputation and offer nice software packages to go along with your trading while cheaper companies don't offer as nice of benefits. Software packages consist of live charts, screeners, and more. It all depends on which type of trader you want to be.

Here is a quick list of types of brokers and there commissions-
  • Full Service- expect to pay at least $200. They do everything for you. The only say you have is to get reports back from the company asking how much money they made or lost.
  • Discount- charge about $40. They handle in-house research and carry out your buy and sell orders.
  • Deep Discount- charge roughly $10. The firms charge even lower commission because they exist for the purpose of carrying out stock trades; nothing else. Investors don't get much research assistance but are ideal for those who want to conduct their own research and just need someone to place their trades.

Here is an easily understandable explanation of how the process of buying and selling stock works. *Make sure to click back when finished reading.*

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"The Market"

Every day you hear the market is up or down. Have you ever gotten the real meaning of what "the market" is? Usually it refers to the U.S. stock market and measured by the Dow Jones Industrial Average, abbreviated as DJIA or called, The Dow. Dow corning you might say? Eh, not quite. In fact, not even close. The Dow is the average of 30 well-known Companies such as IBM, McDonalds, Merck, Wal-Mart, and Microsoft. Since the Dow is an average it is a simple way to judge the trend of the overall makret.

A more popular index is called, Standard & Poor's 500, or S&P 500 for short. It tracks 500 large companies. The S&P 400 mid-cap tracks 400 medium companies, and so on. Where are the exchanges where buying and selling is happening? 3 places- New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and National Association of Securities Dealers Automated Quotation system (NASDAQ) .

To trade on the NYSE, a company must have at least 1.1 million shares of stock outstanding, boasting profits of $2.5 million or more, and be worth $18 million.

Next is the AMEX which is smaller than the NYSE. To be listed here, a company must have at least 500,000 shares of stock outstanding with a total of at least $4 million and annual pre-tax imcome of $750,000 or more.

The NASDAQ is a little different. It is all computerized. On the other large exchanges, there are people inside buying and selling. With the NASDAQ, there are no floors of people, its all in a giant computer system. To be listed here, a company must have at least 400 shareholders, outstading stock worth at least $8 million, and annual pre-tax income of $1 million or more.

Now, is all of this about the indexes necessary to know? I guess not. It is nice to know what the NYSE, AMEX, and NASDAQ are, but how large the companies must be and the regulations of being listed within them are not that important. This is just the beginning, so don't panic if you don't quite understand at the moment. As i go on, things should start taking place and you will begin to realize the way the market is played.

All the best,

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