The Basics of Stock Investing – Part 4

Note from Marj: This fantastic series of posts is contributed by The Investment Club Network (TICN). TICN GB Ltd kindly agreed to help us with our financial education so TICN will be running a mini-course about investing here in easisell.com/blog! We’ll publish one article every 4 days so you can learn in bite-size chunks.

I can personally vouch for the quality of support and education TICN offers – it’s world class and they are really serious about working with you towards your financial freedom. If you really want to be financially free but never took the time to learn how to invest, now is the time. I strongly urge you to commit to this mini-course and start investing in yourself and in your financial education now!

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Course Contents

• The Basics of Stock Investing – Part 1
• The Basics of Stock Investing – Part 2
• The Basics of Stock Investing – Part 3
• The Basics of Stock Investing – Part 4
• The Basics of Stock Investing – Part 5
• The Basics of Stock Investing – Part 6

Know how the Stock Market Works

How the Stock Market Works
Probably one of the most confusing aspects of investing is understanding how stocks actually trade. Words such as “bid,” “ask,” “size,” “volume,” and “spread” can be quite confusing if you do not understand what they mean. Depending on which exchange a stock trades, there are two different systems.

Listed Exchange

The New York Stock Exchange and the American Stock Exchange are both listed exchanges, meaning that brokerage firms contribute individuals known as “specialists” who are responsible for all of the trading in a specific stock. With the help of technology, the specialist quickly matches buyers with sellers. Sometimes referred to as “an auction market,” from the resemblance of all the people throwing their arm up, waving and yelling at the local auction house.

The specialist can see who has stock to buy or sell and at what price. He acts as the auctioneer and links them up for a small fee. The number of shares that are traded on a given day is called the volume, and it is the responsibility of the specialist to keep an accurate count and relay that information to the exchange. There are many Stock Exchanges located in hundreds of countries around the world. The major ones are located in New York, London, and Tokyo. When people refer to “The Market” they are usually referring to the New York Stock Exchange (NYSE).

Over-the-Counter Market

These markets have no floor brokers whatsoever; instead, it’s basically a computer network of dealers. An example of a computerized exchange (ECN) you’ve probably heard of is the NASDAQ. In over-the-counter market, brokerages (also known as broker-dealers) act as market makers for various stocks. The brokerages interact over a centralized computer system managed by the NASDAQ, providing liquidity for the market to function. One firm represents the seller and offers an ask price (also called the offer), or the price the seller is asking to sell the stock. Another firm represents the buyer and gives a bid, or a price at which the buyer will buy the stock.

For example: A particular stock might be trading at a bid of $10 and an ask price of $10.50. If an investor wanted to sell shares, he would get the bid price of $10 per share; if he wanted to buy shares, he would pay the ask price of $10.50 per share. The difference is called the spread. This difference called the spread is the 50 cents difference between the two firms prices involved in the transaction. Volume on over-the-counter markets is often double-counted, as both the buying firm and the selling firm report their activity.

Stock markets facilitate the exchange of stocks between buyers and sellers thus reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Think of the stock market as a sophisticated farmers market linking buyers and sellers. Or say you wanted to buy or sell a stock in a foreign company, what would you have to do? Go to that country, find a buyer or seller, negotiate a price, then exchange your currency for theirs to get the transaction completed? Well the answer could be yes unless you were to purchase an ADR of the company.

Why do Stock Prices Change?

Stock prices are changing every moment of the trading day. Buyers and sellers cause prices to change as they decide how valuable each stock is at that moment in time. Basically, share prices change because of supply and demand. If more people want to buy a stock than sell it – the price moves up. Conversely, if more people want to sell a stock, there would be more supply (sellers) than demand (buyers) – the price would start to fall.

Stock as we have said represents ownership in a company. Therefore, the price of a stock shows what investors feel the company is worth at that point in time. Stock prices can change at any rate; some have dramatic price swings everyday while others stay the same for days at the time. There are hundreds of variables that drive stock prices, the most important of which is earnings. Think of earnings as the profit of a company, the money left after all expenses have been paid, this is what shareholders desire.

That’s it for Part 4! On Part 5, we will discuss How to Read a Stock Table.

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The Investment Club Network provides financial education, coaching and support. We organise educational seminars to help you understand the world of investment – and show you how to invest wisely and profitably. We help you understand how prices move, what factors affect them and by what mechanisms the markets reflect these changes.
Our aim is to outperform the stockmarket month on month thereby giving members real increases in asset values. So whether you wish to learn how the stock market operates, trade online yourself, become an accomplished ‘Self Investor’ or become a member of one of our ever expanding number of clubs, TICN can deliver this to you.

Related posts:

1. The Basics of Stock Investing – Part 2
2. The Basics of Stock Investing – Part 5
3. The Basics of Stock Investing – Part 6
4. The Basics of Stock Investing – Part 3
5. The Basics of Stocks Investing – Part 1