A stock is a share of ownership of a publicly traded company. When you own stock of a company, you become the shareholder of that company. As a shareholder, you have the right to receive dividend payments from the company. The dividend is a share of the profits made by the company.

Stocks are bought and sold, like any other goods and services, in marketplace exchanges, and the price is typically in dollars and cents. The price of the share, as well as the number of shareholders, are usually what makes up the overall value of the company, though some other factors may also affect it.

Prices of a stock can rise or fall depending on market trends (what traders are buying and selling) as well as how well the company does. A company that keeps losing money will typically see a fall in their stock prices, while a company that is profitable will see a rise in their stock prices.

Stock Trading Strategies

The most basic strategy to trading stocks is called the Buffett strategy. The strategy involves gaining a thorough understanding of a company’s business principles and investing in companies based on how much of the principles they meet. These business principles are what makes up a successful company, and they generally are made up of the investigation of the following questions:

• Who are the customers of the business? In other words, who buys the company’s products?
• What do the customers need?
• Are there any significant competitors in the business that will meet the needs of the customers before the company can?
• What is the overall balance sheets for assets, asset depreciation, and debts owned by the company?

Those who practice the Buffett strategy in investing will usually try and find companies that are fundamentally sound (ie. they have good business principles) but are poorly lead or managed. They will then buy stocks from those companies, and wait for the company to — as expected — have a turnaround. The act of buying stocks and holding on to it until the company does a turnaround is called “Buy & Hold”.

There are many other strategies for trading stocks other than the “Buy & Hold” strategy. “Day trading” is another stock trading strategy that includes buying and selling stocks usually on the same day. Day traders buy stocks right when stock prices experience a minor change, and then sell the stocks when the prices have gone up. They then profit from the difference of how much they sold the stock for and how much they bought the stock for. Day traders can also use a strategy called “Short-selling”. It is where they borrow stocks, usually from a broker, for a given amount of money and then sell the stocks immediately after. If the stock value decreases, the trader will buy the stocks back and pay back the broker, earning the profit from the difference of price of the stock they sold/bought.

Typically, stock investors will practice a mixture of “Buy & Hold” and “Day Trading” strategies. It is interesting to note that a large majority of stocks that are traded on the stock exchange are not held by individual investors but rather by retirement funds and mutual funds. These funds have a manager who handle the trading of stocks funded by numerous amounts of people in a given portfolio.

Advantages & Risks

The biggest advantage of trading stocks is its return rate compared to that of bonds and saving accounts. Over a 30-year investment pattern, stocks are typically projected to have 6-8% compounded annually compared to the 1-3% for bonds. Savings accounts typically have almost no compounds annually.

That being said, however, the risks of investing in stocks are quite high. This is because the market is now currently changing all the time, and dramatic changes can occur in a very short period of time, often unexpectedly. An example of this is when the market crashed in the early 2000’s — in 9 months the market lost half its value between 2008 and 2009. Since then, it has taken almost 6 years for that value to return.

Featured Image: Depositphotos/© ByLove