There is a ton of buzz, romance, fantasy, excitement, and insanity around the concept of investing, trading, or gambling with the stock market.  The average person loves to think about returns, compounded growth, how fast a stock can double, and all those other sexy concepts.  Very few people really thinking about what the stock market definition is.  So before you read any further you probably want to know why you even care about understanding stock market definitions.

If you were like me, you probably thought of the stock market as a wizard behind the curtain.  Some magical or all powerful person or machine randomly moved the stock price up or down and people reacted.   If too many people bought or sold the computer would adjust.  Your job as an investor or trader was to react to the changing price accordingly.  In this mindset your stock market definition would be along the lines of:

The stock market is the mover a stock values which you buy to and sell to

In reality a stock market is a platform that controls the exchange of shares between different people.  The market is simply a medium between people.  These platforms often have rules and regulations that control how people can buy stock, how people can sell stock, and what companies can be exchanged on this stock market.  A key thing to understand is a stock market doesn’t actually buy or sell shares of stock people do.  Understanding this fact will help you be a better trader or investor because people change the whole game.  If you were competing against a computer you’d only have to learn the formulas, learn the rules, create your game plan and follow it until it quits working when you would evaluate to see if the rules had changed.  However, people have these funny things called emotions.  Emotions don’t follow the same rules as business, logic, or common sense.  In the end those things will generally play out because it’s about making money, but in the short term (which can be longer than you think) the stock market emotion of the buyers or sellers can override good thinking.  If you remember that for any share to be transferred there has to be a buyer and a seller you’ll understand the system better.

One Buyer one Seller

When a stock price is moving up it’s because there hasn’t been any issues finding new buyers.  As long as a trade happens quickly at a given price the price will move up, if there are still no issues finding buyers it will move up more.  If this isn’t the case then the price will start moving down until there issues finding sellers.  The stock market requires a balance.  Using this thinking I would state a better stock market definition as such:

The stock market is a entity that controls the balance of buyers and sellers through price control, regulations on buying stock, regulations on selling stock, regulation on stock accepted within the market.

So if price control controls the balance between buyers and sellers why does a stock market need to regulate buyers, sellers, and the shares themselves?

Stock Market Regulation of Buyers/Sellers

If a stock market doesn’t control who can buy and sell what stock and under what conditions you get the problem of manipulation.  If people who have information or influence on the information of a company more than the general public are free to trade within the system eventually no one will trade within the stock market because they will always lose.  If no is willing to trust the system you have no stock market at all and you lose one of the great advantages of the stock market which is liquidity.  Liquidity is the ability to convert your assets to cash or your cash to assets.  If you own a small business you may understand this already.  Your business might be worth $300,000 but only if you can find someone to buy it.  However, if you own $300,000 in stock of a company this is traded on a stock market, you can sell some or all of these shares, do what you need to do with the cash, and repurchase the stock the same day.  This is why maintaining the trust of the stock buyers and stock sellers is so critical.

Regulating the Companies’ Stock

How a stock market chooses to regulate a company stock is through validation of financial records, minimum earnings, minimum revenue, and minimum number of shares.  These are the big hitter issues.  If a company isn’t trustworthy and it’s legal documents are false it will not only crush the company when the news is brought to light, but give a black eye to the stock market as a whole.  If a company is too small it may be too easily manipulated by larger investors.  If there are not enough shares then a stock market may have a difficult time properly pricing the company through the required constant trading creating wild price swings or market manipulation.

In summary the stock market definition is an entity that publishes the going price for there to be both a buyer and a seller of a share of stock in a given company, prevents manipulation or fraud of the value of a company, and profits from the exchange in these shares by creating value to the customer by providing liquidity in what would normally be a hard to exchange asset.

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Morning Exercise Against the Backgrou…

Buy From Art.com

There are really two Chinese stock market choices.  The first is the Shanghai Stock Exchange and the other is the Shenzhen Stock Exchange.

The Shanghai Stock Exchange (SSE) is the  5th largest stock exchange, however, it is also one of the most restricted.  The structure is in A and B shares.  The majority of stocks are listed in  A shares that trade in the Chinese currency renminbi yuan and can only be traded by Chinese traders.  The B shares (with much fewer choices for the investor) can be traded by anyone.

The listing requirements for the SSE is similar to other large exchanges.  They have a market cap minimum ($30 mil), profitability over the last 3 years, and at least 25% of their company is traded on the open market.

The other Chinese stock market is the Shenzhen stock market.  This is like the NASDAQ equivalent in China.  The exchange is completely electronically managed called the ChiNext.  This companies on this exchange are mainly high-tech start ups that are majority owned by the Chinese government.

My personal opinion is with the increased globalized economy many of the large corporations will begin to be traded on Chinese stock markets which will decrease spreads on these companies and increase trading activity.  This will also lend creditability to many of the Chinese companies that still aren’t trusted by the average investor.

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So what is the stock market? The stock market is a system that allows companies to raise more capital funds by selling a part of the company to the general public. This company ownership is called stocks or shares. The funds gained from selling company’s share may be utilized to expand the company of enhance a product. The more shares you have in a company, the greater your influence on the decision making process of it. By giving up a part of the company’s ownership, the original owner gains substantial amount of money for the operational costs and at the same time retains the power over the said company.

The prices of thee stocks may go up in down depending on various actors. Some of the factors that may affect price of stocks include the economy, political issues, unemployment rate and other relevant factors. Because of these different factors that affect the stock market, investing money in the stock market involves great risks. An investor may choose to hold on to their stocks when the price goes down or sell it. Strategies are important for you to be successful in stocks trading.

Because of the vast information revolving around the stock market, there are still a lot of things that a beginner should know about the system. Such stock market 101 information should include strategies, speculating trends, biddings, and learning important terminologies such as spreads, bid, ask and others. If you think that you need more information regarding the stock market continue looking for information regarding stock market for dummies and stock trading for dummies. This information will be significantly helpful in your quest to become successful in stocks trading.

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Here are a couple of investing tips from the Oracle of Omaha.  These are simple pieces of advice taken from the greatest value investor of our time.  These may sound really simple, but remember it has brought at least one man exponential returns over time.  It will sound like stock market 101 but so many investors disregard these principles.

First of all, understand the business you are investing in.  Too many investors buy stocks purely on it’s share price, or some other market valuation.  The market isn’t always right.  Very rarely will an investor actually go in and do research on a company before he invests.  This is vitally important for any trader or investor.

Take Buffett for example.  He reads tons of annual reports every year and that is how he finds his deals.  In fact, he often tells of when he first got starting in this business how he read through Standard & Poor’s directory of companies several times to find good companies to invest in.

Secondly, do your own business valuation.  Buffett does his own and only then does he go and look at what the market cap is.  If the market value is below what he thinks the business is worth, he goes in for the kill.  Otherwise, he stays out.

It doesn’t make much sense to invest in a company that you haven’t valued.  That is going in blind, usually following a trend or a fad.  This might be a good stock investment strategy for a day trader, but for a long term investor, you should know what a company is worth or at least have some idea.

Again, very simple advice, but so often ignored.  It is difficult to valuate a company, but you should learn how to do it and then do it.  It’s not an exact science but you can learn to do it.

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There are some great advantages to small cap stocks.  First of all, these cap sized stocks have room to grow.  If a company is gigantic, they can only grow so much more.  With small stocks, you have a lot more potential that it will grow and may even grow fast.

Secondly, many large institutional investors ignore small cap stocks.  The reason is because in order for a large investor to go to the trouble to buy these stocks, they have to buy a very large percentage of the ownership of the company.  In many cases, it means buying a controlling share in the company.  In order for them to do this, they must get approval from financial regulators.

Once these institutional investors file their regulatory applications, other players in the market see what’s happening.  While the paperwork is being process, other smaller investors and traders will come and buy the stock and drive up the price.  So there is very little benefit for a large investing firm to buy small caps.  Because of this, you don’t have these big guys as competitors and that is surely an added benefit.

The other great thing about small cap stocks is that you can afford to buy more of them.  That means you can diversify more and you should.  These stocks tend to be a lot more risky and volatile.  Many don’t make it big.

In order to offset the failure of a few, you should invest in enough of them to ensure that you have a good chance of at least a few of these to get big.  You can let someone else do this for you buy investing in small cap mutual funds that hold these cap sized stocks in their basket.  By doing this, you are diversifying without having to do your own stock picking which can get tedious with this category of stocks.

There are differences in investing in large cap vs small cap funds. There are different risk and rewards associated with it.  Each investor should decide after much research and getting advice from their investment advisor.

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But you assume no risk in simply having stock options explained to you. An option is simply the right to buy (in the case of a call option) or sell (for a put option) 100 shares of stock at a given price, at a given date in the future. Here are a few critical things to understand:

You are buying the right to buy the shares, not the shares. The right has a value that will fluctuate between now and the so-called expiration date of the option, based on movements in the share price. You may buy and sell this right before options expiration; most people do not buy options to actually purchase the shares, but to make money from the fluctuations in the value of the option.

Stock options have a strike price that is the amount at which you may purchase the shares, if you hold to expiration. If, at options expiration, the price of the stock is below the strike price (i.e. out of the money) the option will expire worthless, because having the right to buy something at a price that is above the current market price has no value.

If, at options expiration, the price of the stock is above the strike price (i.e. in the money) the option will have an intrinsic value that is determined by how many points the stock price is above the strike price, times 100 (because each contract covers 100 shares of stock).

Maybe the hardest thing conceptually about understanding stock options is the concept of time value. In addition to the intrinsic value, which as we have seen will be zero if the stock price is below the strike price of the contract, the market will ascribe a value to our contract based on how much time is left until expiration, and the likelihood that the option will expire in the money (as determined by the “collective wisdom” of the market). This means that while an options contract may have zero intrinsic value, it can still have value because of the time value component, and the stock’s potential to move higher than the strike price before expiration.

Even the most seasoned investors use only a portion of their investment funds to trade options. The old adage is: buy options only with money that you can truly afford to lose. The good news about options is that you cannot lose more than you invest, but studies have shown that approximately 90% of long put and call options positions either expire worthless or are sold at a loss. That should be your real lesson from this stock options explanation: buyer beware: do your homework and don’t get greedy.

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A dividends yield is a percentage return from dividends income, which is based on share pricing. This yield is paid annually . When there are not capital gains, dividend yield is defined by return on stock investment, in both dividend yield definition and ex dividend definition, dividend yield helps investors to determine the amount of cash flow obtained for every dollar invested in an equity position.

In the past, investors used to look at dividends coming from their share holdings to secure cash flow by investing in stock paying higher dividends. Today they are more concerned about capital gains investing in stocks that pay higher. Therefore, dividend definition can be explained as the portion of a company’s earnings  which are paid to shareholders.

On the other hand, stocks ex dividend definition refers to the classification of trading shares belonging to a seller instead of the person acquiring such shares, but once the corporation has authorized the seller to receive such dividends.

Shareholders remain qualified to receive dividends, but difference between dividend yield definition and ex dividend definition strives on the date in which shares are sold for  dividends payment, either coming from registrars or the stock exchange, so makes no difference who is the new shareholder when it comes to receive a payment after sale, although once an ex date is declared, stock drops often in price proportionally to the total amount of dividends a seller may expect.

There are companies that offer dividend reinvestment plans and these  are for those who are looking for good passive income by dividends.

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When you buy stocks on margin you are borrowing money for a portion of the purchase.  Typically average investors can only borrow half of what they wish to purchase.  Crazy hedge funds can get away with borrowing much much more.

If your investments fall in value and the amount of your investments is worth an amount close enough to the amount you owe the brokerage may initiate a margin call.  In most instances they will sell enough stock, regardless of the price, to pay off your loans usually leaving you with nothing or near nothing.  Unless you are well established you have very little say in the manner.  Any firm you buy stocks on margin with should provide a margin call formula or margin call calculator so there is no misunderstanding on when your account will be in danger.

Having your stocks sold on a margin call has two devastating impacts to the investor.  One is the stocks are sold when the price is down.  This is usually the exact opposite of when you wanted to sell unless it saved you from a plummeting stocks.  The other negative impact is to the psychology of the investor.  They now feel defeated and will be less capable of pulling the trigger on the next good investment they come across.  Hesitation on a well defined plan leads to lost profits.

Margin needs to be used as part of a well developed plan and not a guarantee of massive gains.  If your losses aren’t minimized to smaller swings than your wins than high margin accounts will wipe you out.

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Exchange Traded Funds allow an investor to invest in a large number of stocks thereby obtaining some level of diversification in their portfolio.  ETF’s are easy to get into as well as get out of as they are essentially the same as buying and selling any stock.  How long you hold them depends on your investment style or strategy.

Besides diversification there are many other advantages to Exchange Traded Funds when buying stocks, they tend to have lower costs as they are often not managed like mutual funds tend to be.   Unlike some mutual funds ETF’s are very transparent.  They are easily bought and sold at market prices any time during a trading day whereas mutual funds are purchased at the end of the day regardless of when you placed your order.  This also allows the investor to place strike points on their purchases or sales of an ETF.

Like mutual funds there are a wide variety of ETF classifications such as Income ETF’s that try to track the performance of a particular stock market, Commodity ETF’s that track certain commodities such as precious metals or futures.  There are also Bond ETF’s that track a wide array of bonds as well as Currency ETF’s tracking many of the world currencies.

One interesting area of exchange traded funds is inverse investing where the ETF can be used to invest in opposing market trends.  These use derivatives to try to obtain returns that are opposing the market.  For example a Bear market ETF can make gains in a declining market environment.

As with all investing ETF’s come with risk.  It is up to the investor to do his or her own research and decide if exchange traded funds are a worth while investment vehicle for their portfolio.

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Before the computerization method began, the stock market ticker symbols were just simply printed out in a thin piece of paper that was continuously streamed from a ticker-tape machine. During that time it took a lot of effort and time for a broker to create a report.

However, for those who don’t know about it, the stock market ticker symbols are letters or once in a while also will include numbers that are used by a broker to denote a particular company’s security that is being traded publicly.  The location where the security, or stock, is sold is known as a stock exchange. The stock symbol is chosen by a certain company when it decides to go public.  When a company decides to go public, it determines the amount of shares it wants to issue.  It also decides what price it wants to try and open its initial public offering (IPO) at.  The company will set up a financial broker to offer its stock to the public.  It will also go around the country trying to drum up interest in its stock.  This is so the IPO is not a flop.  During the 1990’s, there was a lot of interest in IPO’s.  If you could manage to get in on the ground floor, you could make a killing in just a short time in which you would buy shares and then wait for the price to go up which it usually did.  Then you would get out before the price went down.

IPO’s are not so prevalent now and are not so volatile. People are more cautious about what they invest in.  They tend to take a more wait and see attitude.  However, there are still opportunities for the person with the right trading system and knowledge.

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