Stock Market for Beginners: How does stock trading work?

Why Trade?

To understand how stock trading works, it's important to first understand why it exists in the first place. Why do companies offer shares of their company to complete random strangers and then share with them their firm's hard earned earnings?

Businesses, large and small, have projects and activities that they are confident will be very successful. Sometimes the capital (money and resources) they need for these activities is more than what they currently have. So, instead of taking out a loan from a bank, they offer to sell a share of the company in exchange for the funds they need. When they sell a share of the company, they're agreeing to share their profits with investors.

As an investor, you purchase the stock believing that the business's endeavors will be successful and that they will make more money than what you, and all the other investors, put in. What you receive in return is fancily known as your "return on investment". However, a return on investment isn't always positive. When the company you invest in profits, so do you. But when they don't do well, then you're at a loss as well.

When you hear talk about stock trading and shares, remember this: You buy the stock and share the risk. The only thing you "trade" is money for stock and vice-versa.

How does it work?

The truth is, there isn't really just one "stock market". There are stock exchanges in locations across the globe and the World Wide Web, creating several possible marketplaces for trading to occur. In the United States, the most predominant stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ. These exchanges help bring businesses and investors together.

Each stock is given a price that is representative of its value, which is called the stock's market price. At any given time while the market is open, investors can buy and sell stocks at the market price. The market price for a stock changes during this time depending on how well the business is going, how much stock is available to purchase, how much stock is wanted by investors, and other factors.

To invest in a stock, the first step is to let your stock broker know you're interested. Then tell the broker how much stock you want for a specific company at the current market price. The order is placed. And someone willing to sell the stock (it could be the company itself) to you at the agreed upon price. Once the agreement is made, the exchange is complete. Congratulations, you're now invested in a company.