LEARN the Stock Market Basics in 5 MINUTES

Stocks (or Equities) are shares of a company that you can trade with other individuals on the stock market. The companies issue stocks to raise capital to grow the business or undertake new projects. If you own a stock, you are a shareholder. However, as a shareholder, you do not own the company.

Shareholders only hold shares issued by the corporations. Corporate property is legally separated from the shares they issue. In case a corporation goes bankrupt, your shares are not at risk to be sold even though the price may have fallen dramatically in the process.

Owning stocks gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when the companies distribute them, and it gives you the right to sell your shares to somebody else.

Common Stock

When people talk about stocks, they usually refer to common stocks, which is how the majority of stocks are issued. Common shares represent a claim on profits (dividends) and confer voting rights.

Preferred Stock

Preferred stock functions similarly to bonds, and usually doesn’t come with the voting rights (this may vary depending on the company, but in many cases preferred shareholders do not have any voting rights). With preferred shares, investors usually have the guarantee of a fixed dividend in perpetuity, and in case of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders and other creditors).

Shares of a company become available through an initial public offering (IPO) on a specific stock market exchanges.

Typically, stock market exchanges are physical locations with a trading floor, but increasingly they become virtual, in terms of a network of computers where all trades are done electronically.

Companies do not buy or sell shares regularly on the stock market (they may engage in stock buybacks or issue new shares, but these are not day-to-day operations).

You do not buy stocks from the company directly, but from another shareholder, thereby you see which shares are available.

Each trading day is comparable to a fight between optimists (bulls) and pessimists (bears), who buy and sell at various prices according to the different expectations. The result of this battle is ultimately reflected in the price of a stock.

Most people only know the “Bull”-way of trading stocks which means buying a stock with the expectation that the stock price will rise later on, and then they sell it for a higher price to realize a profit. However, the risk is to lose what you have invested in case the stock price turns 0. This way of buying shares is also often called going long.

As a bear, you borrow shares and sell them at a specific price expecting the price to go down. Later on, you buy them back at a lower price and thereby make a profit. This way of trading is often called going short.

You can not short every stock as a retail trader. It heavily depends on your broker and how many shares they have to borrow of a particular stock. Some stocks may even have a borrowing fee on them (often referred to as “hard-to-borrow” stocks). Furthermore, in case you want to hold a short position overnight, you have to pay overnight charges that vary from stock to stock.

For you, as a trader, borrowing shares is not more complicated than going long. All this is done for you by your broker in the background.

Short-sell restrictions

Short selling can also be restricted by markets when the stock sells off more than 10% in one day to prevent it from falling too sharply and protect bulls that are long the stock. If a stock gets restricted, you cannot enter a short position on market price anymore. You have to get into the stock bidding at a higher price. This can be very difficult for newer traders to deal with and is one of the reasons we recommended the broker Tradenet as short sell restrictions do not apply with this broker.

For Beginners, it is usually recommended to pick the markets with the most liquidity. As you see in the liquidity chart above, the New York Stock Exchange (NYSE) and the NASDAQ, which are both located in New York (USA), have the most liquidity.

It is recommended to trade where the most liquidity is! More liquidity means more action and better opportunities to make money.

You will see the most significant moves on high volume during the first hour after the market opens and in the last hour before the market closes.

Both markets open at 9:30 AM and close at 4 PM EDT (Eastern Daylight Time, New York), but depending on your broker, you can also trade the pre- / and post-market.

Pre-/post-market trading is like regular trading but with much less volume (lower amount of shares traded because fewer people are buying or selling shares). This also means higher volatility (more significant moves up and down), so it is much more dangerous to trade.

Pre-market hours go from 4 AM to 9:30 AM EDT. Post-market hours go from 4 PM to 8 PM EDT.