You may have heard the terms and phrases, 'stock trading', 'buying shares', 'investing in the stock market". If you are not a stock trader or are a beginner in the arena of stock trading, you may want to understand what stock trading is.
In this article, we shall endeavor to explain 'stock trading' in a manner that is easy to understand for novice stock traders.
So, first of all, what is a stock?
A stock, also known as a share or equity, is a minute share in the ownership of a company. When you buy a stock, you become a partial owner of the company whose stocks you have purchased. With this partial ownership, you become entitled to a portion of the company's profits. These profits may be paid to you by the company in the form of 'dividends' or gained by you in the form of 'appreciation' (an increase in price) of the company's stock.
In other words, if the company does well, you can sell the purchased stocks to another trader at a higher price than what you got them for and make a profit out of it. Also, in case the company goes bankrupt, you have a claim to their assets after the creditors of the company get paid off.
Debt financing vs. Equity financing
Let us try to understand why companies sell stocks.
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How does a company raise money?
It can do so by either borrowing money or raising money by selling stocks.
When a company borrows money to aid its growth, it is known as 'debt financing'. It may borrow from a bank or from the public. The public can purchase 'bonds' which are, essentially, a kind of loan that the bondholder will receive an interest on. At 'maturity', the bondholder is returned the original money loaned to the company.
When a company raises money by selling 'stocks', it is called 'equity financing'. It sells out its 'ownership' to the public and, in return, guarantees them neither interest nor a payback. Why would you buy a stock if you aren't assured of being paid interest on it?
As mentioned earlier on, when you buy a stock, you may receive a regular 'income' from the company in the form of dividends, if the company is doing profitable business and is stable. If the company is a high-growth company, implying that it believes in re-investing its profits into its growth instead of sharing the profit with its stockholders, you can still benefit from buying their stocks through the possible 'appreciation' of the company's shares.
Basically, you buy a company's stocks in the hope that the company will prosper and the prices of its stocks will increase.
For novice stock traders, it is advisable to hire a full-service broker who, other than acting as a 'salesperson' in the stock market, also gives the trader tips and advice on how to trade stocks.
Now-a-days, 'online' stock trading is quite common as a means to trade stocks. This means that instead of having to be present at a physical exchange (a place where sellers and buyers meet) such as the New York Stock Exchange, you can trade stocks over the Internet.
Online brokerages/brokers charge varying 'commissions' for each trade and may or may not offer additional services. The line between the online stock trading industry and the sites that offer the technical know-how of stock trading is blurring. You can expect the services of a 'full-service broker' from online brokers as well in a lot of cases.
To enlist for stock trading tips and the creation of an online trading account in its affiliate online brokerages, you can visit www.otcbully.com
Article Source: http://www.articlesbase.com/day-trading-articles/learn-what-stock-trading-is-all-about-7193614.html
About the Author
The author has a degree in finance.
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