Hello everyone, I am a Finance grad but wasn't at all into it during university. Now I feel matured and ready to tackle what I know I was meant to do. But I have many questions. I am 25 now and would like to become a full time trader in the hopes of eventually working for a top hedge fund or other investment banker. My first question is: How exactly do stocks work? I mean, I've read alot about debt and equity instruments but I would like to know exactly what happens when someone "buys" a stock or a share of stock. I have many rather simplistic questions such as the above but I feel like I need to know the basis and fundamentals if I am going to be successful. Thanks
When you buy a share of a stock, you need a seller. The seller is either a long seller (someone who already owns the stock) or a short (someone who is selling the stock without owning it, hoping to buy it at a lower price). The price of a stock is determined by the best bids and offers.
Thanks Nofear777. How can someone sell a share without owning it? And if the price of the stock is determined by the best offers, does that mean the prices are determined by supply and demand? If a stock is in demand, wouldnt everyone buy it and drive the price up?
Finance major and you have no idea how stocks work? Each share of stock in a company represents a tiny piece of ownership of that company. The total value of the shares, known as market capitalization, represents the public's opinion of the company's net worth. As the opinion of the value of the company changes the stock price will go up or down accordingly. Stocks are listed on an exchange and people who want to buy the stock make bids for it. For example, if I wanted to own 100 shares of IBM I could place a bid to buy 100 shares at 140.50. Those who want to sell the stock put up offers to sell. The seller could put up an offer to sell 100 shares at 140.70. As time goes on the bids and offers get closer and closer until someone decides they will accept a price that someone is bidding or offering and a trade takes place. The price at which that trade takes place is considered the current price of the stock. So all day long buyers and sellers of the stock adjust their bids and offers as trades are made and the price of the stock goes up and down. If there is good news or people like the company there will be an influx of bids and a lack of sellers, which will drive the price up. If bad news comes out there will be many sellers and few buyers and the price will go down. Eventually the price levels off as buyers and sellers think the true value of the stock has been found. If you open a trading account somewhere you'll be able to see the bids and offers and make trades for a fee. If you have a broker you can simply say, "get me 100 shares of IBM" and he will go to the market and get them for you or sell you some out of his inventory. Again, you get charged a fee. Of course, you'll need to have some money in your account to cover the cost of the trade and the fees. So I guess that's it in a nutshell. Can be a weird concept to grasp until you actually see a Level 2 box that displays all the bids and offers and trades that are being executed.
I'm gonna give you the best piece of advice you're ever gonna get in your entire career --->> Forget trading as a profession. If I could turn back the clock I would never pick trading as a profession knowing what I know now and I'm successful at it. Go to law school or something.
matty I think you have a long road ahead of you. There are a lot of things you need to know in trading stocks. The very basic: when a company wants to raise money to expand, there are 2 ways to do it: 1) Borrow money from the public. That would be issuing company bonds. They pay investors a promised interest at a pre-defined rate. 2) Offer partial ownership of the company. That's company stock. Stock prices fluctuate according to the public's perception of the company. There are 2 ways to make money in stocks. 1) Get dividends paid by the company. But not all companies pay dividends. Most growth companies don't. 2) Through price appreciation. Simply you buy at a lower price, sell at a higher price. Dividends are usually almost negligible compared to price appreciations. Perhaps read as many books as you can on the subject. You will find a variety of approaches to trading.
+1 The same advice I give anyone who asks. With the ten years and many, many thousands of dollars I've invested to become a consistent trader, I could have had an MD and a couple PHDs. Was it worth it? No, not really. It takes a long time - years - to get the point where you can trust your instincts as a trader. And every day it is still a tough and often boring game.
Matty, Good thing you came here !! but watch out for discouragements. Here is one - Trading is the toughest thing that you will ever do in your life. You will break multiple times mid way and you havn't even started this journey yet. You are very fresh as you Want to know what a stock is ?? Before you clobber your mind with definitions and what is what. Answer these questions for your self. "Why do you think this is a right career for you" if answer is money then you just do not understand it YET. "Do you want to be a Day trader or a Investment banker" They are very different with very different and difficult journeys. Investopedia.com, Google and These forums are good place to start. Hope this helps.
Hmmm interesting responses and thank you. While it is true that it may take years of hard work, so would law school, and so would any other profession that is high pay. My brother is a prominent international lawyer. I could follow his footsteps, but I dont like law. however i DO like money, finances, how companies make money, what they do with it, etc etc. So maybe I shouldnt be a trader but maybe I could be a specialist in corporate finance or something like that. Or you guys advise against that as well? I think the one edge I have in trading is that I have played professional poker for 8 years and the rules are similar to trading. i.e. discipline, patience, psychology