Stock Trading Basics
By Devin Simmons
Ah, the stock market, the land of dreams, yachts, and making money fast. So you’re interested in getting started in investing? In this lesson, I’ll take you through all the basics of investing in the stock market, as well as the strategies and terminology that you’ll need to know before you get started. Alright grab your pen and paper and lets get on the way to making some serious money.
What is the Stock Market
Chances are you have heard about the stock market, whether it’s from your friends, television, movies, or just from daily life. You have probably seen green and red tickers rolling around or have heard terms like NASDAQ, S&P 500, Dow Jones, and others. The stock market or its synonymous term the Stock Exchange is a place where someone can purchase a stock or a share (they are the same) of a business. These stocks represent a part ownership or equity of the business you’re buying into. These ownerships are bought and sold countless times a day, and the price you pay and the price you sell for are determined by you. The price of a stock is determined by the bid (the price that the buyer wants to buy at), and the ask (the price the seller wants to sell at). When these prices meet the sales takes place and the transactions are made on a first come – first serve basis. These prices can be influenced by many things, but mostly are by the laws of supply and demand. As the supply goes up, the price goes down, and as the demand goes up, so does the price. It’s best practice to buy a stock when it’s low, and sell it when it’s higher for a profit. As you can see here, it all seems pretty simple but this is only the concept behind actual stock trading.
Individual Stock Information
Now that you have a general idea about the concepts behind the stock market, lets take a look at some information you can find about a stock. Lets take a look at the stock for Advanced Micro Devices, INC (AMD). This stock is one of my personal favorites as over the past year it has grown over 700%. To put this in perspective, if you would have invested $1000 into AMD in March of 2016, today that would have grown to a $7000 investment. Pretty cool right?
AMD on March 20th 2017, courtesy of Yahoo Finance
If you take a look at the stock information for AMD above you’ll see a whole bunch of great information. At the very top you’ll see the current price as of writing this article is $14.37. This is the current price of the AMD stock in the market. To the right of that the green +.88 means that the stock has risen by 88 cents per share today, or in percentage terms 6.52%. Down below you’ll see a graph, currently this is set to 5 days, but you can change it for a variety of times. This graph will show you the dates and the changes in the stock prices over that span of time. It’s very important as an investor to make sure you study your stocks before investing to give yourself the best chance for success. If you don’t you risk buying at the peak and watching your money slowly bleeding away due to negligence.
Down in the statistics area first you’ll see the previous close and the open segments. The previous close is the price the share closed at on the last trading day, and the open is the price the stock opened at on the current trading day. The bid section is the current number of bids at the bid price, and the ask is the current number of shares being asked for at that certain price. As you can see there are 5300 shares being bid on at 14.37, and 8800 being asked for at 14.38. Underneath the ask-price there is the Day’s range, this is the range of the price of the stock for the current trading day. As you can see AMD traded for 13.54 all the way up to 14.50. Beneath that is the 52 week range, which simply is the range of the stock price for the last 52 weeks.
In the next section you’ll see a new term called Volume. Volume is a number of shares that have traded hands in the current day. So looking at AMD for today March 20th 2017, there has been 71,593,503 trades today. The average volume is just like the regular volume, but it is the average over the span you’re looking at. So the average of this time period we’re looking at is 66,569,358 trades per day.
The next statistic we’re going to look at is the Market Cap. The market cap of a company is the total market value of all the shares of a company. So at this point in time AMD shares in total are worth 13.55 billion dollars. Next up is the P/E ratio. This ratio is the Price/Earnings ratio which is calculated by taking the Market value of the share and dividing it by the earnings per share or EPS. This number is a good indicator to see which direction a company is moving, and can be a great way to judge if a company is worth investing in. The EPS is the earnings per share, this is calculated by taking the profits of the company and dividing them by the number of common outstanding shares. If an EPS is negative it means the company lost money, and if it’s positive they turned a profit.
Alright, now that we’re through a large chunk of the statistics grab yourself a drink and lets finish up on dividends
Some stocks offer a dividend to their share-holders, a dividend is a payment from the company to their shareholders each quarter. Basically, the company is paying you to own their stock! Each company sets how much you will be paid per share, but over time you can make some serious money off of these. Let’s take a look at one of my personal favorites Saratoga Investment Corp.
SAR on March 20th 2017, courtesy of Yahoo Finance
Saratoga during the last quarter SAR gave their shareholders a whopping $.46 per share. Since this is paid quarterly a shareholder of SAR would make themselves $1.84 a year by just owning the stock. The great part about dividends is that they can help to offset a drop in share price, and can help you to build a long-term portfolio. As you see next to the dividend the yearly yield is also listed. This 8.24% is the percent of the share price you’ll receive each year from owning the stock. Though this is a yearly yield, and not a quarterly yield. If needed you can divide that by 4 to get your quarterly yield percentage. Down below the dividend and yield, you’ll see the Ex-Dividend Date. This is the date that you must own the share on at market open to receive a dividend. If you buy a stock that day you will not receive a payout. Lastly, you’ll see the 1yr target estimate. This is an estimate of where the stock price will be at in a year. These statistics are estimates, so be wary of trusting them, but they can be a great indicator of how well a stock is projected to perform over the next year.
You’ve made it!
Hopefully, you have gotten a strong foundation down on the basics of stock trading, and if you’re ready to move forward and learn more check out our Pt.2 where I’ll walk you through researching and scanning stocks to find them before it’s too late
If you have any questions please write us a message in our forums and someone will be happy to help you.