Basics of Stock Market

Posted at November 9, 2009

Financial markets – recent battlefields of new-age. Battles are led between buyers and sellers. Those two sides are kept by strong rules, in order to have trades under control and transparent. A buyer of a stock believes, that it will increase its value in future. A seller sells when his stocks reach a level, when is willing to sell. Generally are financial markets in larger part affected by fundamental data than by purchases or sales.

 


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Why Companies Emitte Stocks

By emitting a certain amount of stocks, companies get additional capital from investors. It helps company to expand and to invest more. Simultaneously there come up information duty to company’s investor. Even with one owned stock you become part owner of a company, which gives you some privilege of a part owner.

What is a Stock

Most of people actually don’t know what is a stock (share). Imagine, that we have a company which have 1000 stocks in total. This number is 100% of company’s belongings. It means, that when you buy one stock of a company, you are in this time owner of 1/1000 of each company’s item. Every traded stock under 6 months of ownership must be taxed (amount of months can be different coutry from country).

What Affects Price of a Stock

Stock price is affected by achieved operating and expected results, progress of industry and by the status of country’s economy.

Stock price will increase when…

The stock price will decrease when…

There are the basic facts about security rate movements which can appear in stock market. It is not said, that after these signals stock will change its price for big amount of percentages to more negative or positive numbers. But it gives to market instigation for revaluation the stock price. Sometimes can happen, that market acts in different ways in contrast to published report. Market is unpredictable and no one can say in advance what happen next. We can only say, what is more probable.

How the Market Works

On the market meets two sides – demand and supply. There are traders which want to buy and which want to sell. These two sides stand against each other. You can buy stocks only when someone want to sell amount, which you request. As well you can sell only when someone want to buy for the price you offer. Keep in mind, that stocks which no one want to buy will stay with you. Their price can decrease and you will realise no profit or worst. The best possible way how to deal with it is to trade stocks, which indicates very high interest from investors. The more trades a day with the stock, the better. You could be always sure that your pack of stocks will be sell able. That someone will have interest to buy it from you.

You can notice, that the basic of market is in change. I will give you this and you will give me this. Piece for piece. The possibility of ease of selling is called liquidity. The more liquid market, the higher chances to sell your pack of stocks.

How can you find out if your stock is liquid enough?

Look for Volume indicator and apply it on the chart of this stock. The more trades (more traded money), the better. You can compare its values with other stocks to understand better.

With liquidity there comes also volatility. It indicates how big the stock have tendency to move up and down. Very high volatile market can be very dangerous for non-experienced or imprudent person. Here is also chance to be entraped to sell from fear, because value of your portfolio can move up and down very fast. It is better to choose such stock, which moves are in adequate speed.

How to recognize good trade

There are used countless of strategies how to find out stock’s grow potential. There are three ways which you must keep in mind when deciding to enter a trade.

There exist three helpful analyses:

Fundamental Analysis

This is the most important analysis for long-term investments. It is focused on the overall state of the economy, interest rates, production, earnings, and management. Into Fundamental analysis comes “What affects price of a stock” paragraph above. In basic we try to recognize, if the company will be doing well or not.

Propositon of every analysis is very complicated and requiere expert knowledge to offer complex information. I want to show you this broad issue in basic, which helps you to understand what is it about. Even in the very basic level of knowledge it is quite useful and can be used.

In this case we look for information about the company’s progress. We are interested in annual results, health, management, development etc. everything what has something to do with good numbers for the company.

I have one simple example.
Let’s say, that we have a company, which produce Renewable energy. Renewable energy increase its influence every day. In future it seems to be the main source of energy. We know, that it has very strong position in producing Renewable energy worldwide. There is chance, that US government offers a high dotation as a support for expansion and new technologies for this company. It would signify very important event and increases company’s value in jigtime. There is also not known, that company has a research of a new technology which would use space energy instead of resources on the Earth. In difference of Earth’s renewable energy is much more faster gainable and more powerful.

Analyze this simple information.

First information is for market neutral. Market is always several months more forward than real economy. It is an information which is valid in present and those kinds of information are already in market included.

Second information tell us, that this kind of industry still have a space for increasing its value. For market it’s neutral information, but in long-term view it’s for trader positive.

Third information is more interesting. Market already knows about the governemnt’s offer and includes information also about success and fail of this project. There can happen two possibilities. If the US government successfully finalize dotation for this company, it’s value will increase very fast, because traders will buy and fundamental data will help to increase the security rate too.

The last, fourth information, is the most interesting of all. For first, in this phase, it is still internal information which market doesn’t know. It is not included in security rate. Those information have the highest effect in changing security rate very drastically. In case that it’s very important innovation like in our case, market will react very positive (for 99%). That is why have managers (or other persons with access to company’s secret information or results) of big companies prohibited to trade its own stocks, because they know internal secret information. Time from time are some managers arrested because police discover their little investment secret. It also happened in our country, one manager earned with this not allowed investment many millions. It is called Insider Trading and it is based on information, which aren’t accessable for all market participants.

Technical Analysis

Technical analysis is highly used for short-term trades. There are used mathematical calculations in combination with historical data, which aren’t quarantee for future development of security rate, but it gives approximate appraisement for the future. It is known, that history repeats. There can be seen many same chart figures, which you can standardly see in daily chart progression. Many traders base their trades on those figures.

As the most used tools in technical analysis are regarded Moving Average, Trend Lines, Support & Resistances and Volume Indicator.

Psychological Analysis

Psychological analysis is next to Fundamental and Technical Analysis one of the ways to investments on financial market. Compared to the other ones is also very different. It doesn’t study concrete stock, other fundamentalists and not even charts, but human behaviour in investing. Since is investing collective business, then it becomes pivotal of crowd analyse and impulses of massive buying or selling.

There exist a few theories about crowd. Almost every theory is based on fact, that exist two different types of investors. The first one are professionals, who act sensibly and the second ones are players, who act chaotically.

Psychological analysis is exercisable on shorter period of time. It study behavior of crowd in short period.

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