Understanding Stocks

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UnderstandingUnderstanding
StocksStocks

Understanding stocks is the basis forUnderstanding stocks is the basis for
investing in the stock market.investing in the stock market.

The old saying about not seeing the forestThe old saying about not seeing the forest
for the trees applies to many new traders,for the trees applies to many new traders,
bedazzled by the breadth of tradingbedazzled by the breadth of trading
opportunities, the expanded tradingopportunities, the expanded trading
abilities brought to us by leveraged tradingabilities brought to us by leveraged trading
strategies such as hedging, and the sensestrategies such as hedging, and the sense
of power can go with online trading.of power can go with online trading.

Before We Continue…Before We Continue…
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Understanding stocks is the first of theUnderstanding stocks is the first of the
basics of stock investing.basics of stock investing.

Stock shares are partial ownership in aStock shares are partial ownership in a
company.company.

Owners of shares of stock share in theOwners of shares of stock share in the
profits of the company but do not directlyprofits of the company but do not directly
manage the company.manage the company.

The stock investor has a share in the overallThe stock investor has a share in the overall
value of the company but not in itsvalue of the company but not in its
individual assets or its debts.individual assets or its debts.

The stock of a company is a representationThe stock of a company is a representation
of the first money put into a company.of the first money put into a company.

The value of stock in a company isThe value of stock in a company is
dependent upon the ability of a companydependent upon the ability of a company
to make money either by selling itsto make money either by selling its
products, selling off assets, or beingproducts, selling off assets, or being
voluntarily or involuntarily bought byvoluntarily or involuntarily bought by
another company or individual.another company or individual.

The total capitalization of a company is thatThe total capitalization of a company is that
of its share multiplied by share price andof its share multiplied by share price and
represents its market value.represents its market value.

In understanding stocks it is important toIn understanding stocks it is important to
differentiate between common stocks anddifferentiate between common stocks and
preferred stocks.preferred stocks.

Common stock is the usual means of stockCommon stock is the usual means of stock
ownership. Common stocks confer theownership. Common stocks confer the
right to vote for company directors and inright to vote for company directors and in
other company decisions.other company decisions.

Preferred stocks are a hybrid that gives thePreferred stocks are a hybrid that gives the
holder equity in the company, preferentialholder equity in the company, preferential
standing for receiving dividends but, often,standing for receiving dividends but, often,
does not confer voting rights.does not confer voting rights.

Also, if a company is liquidated holders ofAlso, if a company is liquidated holders of
preferred stock may have preferentialpreferred stock may have preferential
rights to payment compared to commonrights to payment compared to common
stock holders.stock holders.

Just like bonds that a company sells,Just like bonds that a company sells,
preferred stock is rated by credit ratingpreferred stock is rated by credit rating
companies.companies.

Preferred stock often sells for more thanPreferred stock often sells for more than
common stock as it is deemed a morecommon stock as it is deemed a more
secure stock investment.secure stock investment.

Understanding stocks also includesUnderstanding stocks also includes
understanding how and why stock priceunderstanding how and why stock price
varies over time.varies over time.

Long term investing in stocks typicallyLong term investing in stocks typically
means looking at the price to earningsmeans looking at the price to earnings
ratio of a stock as well as cash flow ratiosratio of a stock as well as cash flow ratios
to determine what a stock is worth.to determine what a stock is worth.

These are fundamental analysis factorsThese are fundamental analysis factors
used to determine basic stock value.used to determine basic stock value.

Technical analysis of a stock involvesTechnical analysis of a stock involves
looking at price movements andlooking at price movements and
comparing to known price patterns incomparing to known price patterns in
order to predict future prices.order to predict future prices.

Although traders in stocks and commoditiesAlthough traders in stocks and commodities
have used fundamental information tohave used fundamental information to
guide their decisions for centuries theguide their decisions for centuries the
development of Candlestick trading tacticsdevelopment of Candlestick trading tactics
in the 17th century was the first realin the 17th century was the first real
technical trading.technical trading.

Technical analysis tools such as CandlestickTechnical analysis tools such as Candlestick
charting guide traders today incharting guide traders today in
understanding stocks and their priceunderstanding stocks and their price
movements.movements.

The old saying that Candlestick basics letThe old saying that Candlestick basics let
the market tell the trader what the marketthe market tell the trader what the market
will do is as true today as whenwill do is as true today as when
Candlestick chart formations guided riceCandlestick chart formations guided rice
traders so long ago.traders so long ago.

Understanding stocks and understandingUnderstanding stocks and understanding
what drives price movements will givewhat drives price movements will give
today’s trader the same advantages intoday’s trader the same advantages in
trading stocks, trading options, tradingtrading stocks, trading options, trading
commodities or trading futures that thosecommodities or trading futures that those
practicing Candlestick charting techniquespracticing Candlestick charting techniques
enjoyed in the days of the Samurai.enjoyed in the days of the Samurai.

Understanding Stocks

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