How To Make Money In Stocks
A "stock" - more commonly known as a share in some parts of the world - means a portion of ownership or equity in a company. As such, a stockholder is essentially an owner of that company with specific rights and obligations. Companies list on the stock market - or more precisely, a specific stock exchange - to sell their equity to the public, and thereby raise capital they can use to grow their business. Once a company has listed on a particular stock exchange its shares can be traded on an ongoing basis by investors and traders alike.
While people often talk about "the stock market" they are usually referring to either a particular (physical) stock exchange where companies' shares are available to trade... or the sum total of the world's stock exchanges. In other words, if someone claims to trade the stock market, they may be referring to the general principle of trading stocks, or they may be referring to trading shares on a specific stock exchange. Stock exchanges can be large or small, depending on how many companies are listed, and the value of their share capital. The major stock exchanges are the Tokyo Stock Exchange, Bombay Stock Exchange, London Stock Exchange, Frankfurt Stock Exchange, Shanghai Stock Exchange and the New York Stock Exchange.
Buying and selling shares involves contacting a stock broker and asking them to settle the trade on your behalf. In return for facilitating this transaction, they will take a commission - either a flat fee or a percentage of the value of the order. You can call a broker via telephone or simply place your order on their website (most broker's have websites to enable this).
So how do you actually make money in stocks? Well, there are a number of ways, but a lot depends on your goals. If your objective is to invest for the long-term then you might take the view that, over time, a company's share price reflects its financial value. If you buy now, and the company's performance improves, your stock holding should be worth more in the future. You can either cash in the profit you've made or keep the stock in the hope that it will continue to rise in value.
In fact, this is the perspective generally taken by "fundamental investors" to make money in stocks. Fundamental investors use fundamental information about a company (primarily its financial performance) to justify buying, holding or selling stocks. Fundamental investors tend to hold their investments for several months at least, often a few years, and in some cases decades.
The other main type of investor is not really an investor at all - he or she is really a "trader". A trader typically rejects a long-term approach and seeks to make money in stocks by taking a much shorter term view. Since, in the short-term, prices of stocks are much less indicative of a company's value, there is often little point considering all the fundamentals. What matters is the market's perception of value, not necessarily a company's real value.
Given the capriciousness of the stock market in the short term (i.e. minutes, hours, days and weeks), traders often prefer to use "technical analysis" - the art and science of evaluating price data - in order to issue trades. Technical analysts study price trends - depicted in charts - and draw conclusions about where the price might go next. Then they buy, sell or hold on that basis.
Both "fundamentalists" and "technicians" can make money in stocks. One of the world's wealthiest individuals, Warren Buffet, is a well-known advocate of investing on the fundamentals. On the other hand, there are many traders who swear by a technical approach. In particular, technical analysis holds an allure for many people who are excited by the idea of using a "super secret" trading system to make huge profits.
Trading systems can vary widely. Essentially, a trading system is the step-by-step approach used by a trader to make money in stocks. While there are general approaches to trading e.g. trend following, candlestick charting and others, any given trading system is likely to be tailored by the trader to suit themselves.
There's no question that it's possible to make money in stocks. It's also possible to lose - so it's a good idea to learn as much as you can about stock market investing and trading.
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