How does stock trading work?

Sotck exchange. Joyseulay /

The stock market uses a lot of specialized terminologies. However, you don’t need to understand most of it to trade stocks. Here is a simplified guide to how stock trading works.

What is an action?

If you decide to start trading stocks, you will have an online broker to represent you. This broker will deal directly with the exchange. You will need a brokerage account to start trading. See south africa scholarship for all your business needs.

Stocks come from companies and are used to get money for expansion, developing new product lines or settling their debt. They do this by selling shares of their company. This is called an initial public offering (IPO) where shares become available for the public to buy. The market where these shares can be found is the stock market which consists of various stock exchanges like the Johannesburg Stock Exchange (JSE) in South Africa and the New York Stock Exchange in America. This is where buyers and sellers negotiate, through a broker.

The exchange holds information about all stocks, such as the supply and demand for a type of stock and the prices for each.

Why buy stocks?

When you buy stocks, you are investing. If a company is doing well, the value of its stock increases, and as you own some of its stock, the value of your investment also increases. This means you can hold the stock in the hope that it continues to rise in value, buy more shares, or sell your existing stock for more than you paid and make a profit.

Having stock in a company gives you a share of its ownership, which comes with some voting rights if you’re interested in going that route. Most people stick to increasing their investment.

Another benefit of having stocks is that they can earn dividends. This does not apply to all stocks. When dividends are paid, this is done quarterly.

Risks associated with buying shares

If you have invested R10,000 buying a company’s shares, you risk losing your entire investment if the company goes bankrupt and cannot pay its shareholders. But you cannot lose more than your actual investment. You won’t have to pay anything.

Otherwise, if the stock price drops, your stock value will decrease, but you will still have something left over from your original investment unless it drops to zero.

The value of share prices may fluctuate in the short term without decreasing significantly over the long term. In this case, investors use a hedging strategy to reduce their losses. Another strategy is to invest in the price of exchange traded funds (AND F).

Risks associated with stock trading

The risks of trading stocks are greater than those of buying stocks. You can borrow money from your broker to trade. This is accomplished by making a cash deposit towards a loan which allows you to purchase a larger amount of stock. You repay the interest on the loan. This is called margin trading.

The broker may make a margin call asking you to increase your deposit guarantee. Otherwise, the broker sells some of your shares to compensate for this money. It will probably be at a price that will put you at a disadvantage.

There are ways to minimize these risks. That implies stop losswhich limits your potential losses.

Start small and take the time to learn how to trade stocks.


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