The stock market, once a place known only to savvy Wall Street investors, is now becoming an everyman’s market, with accessibility to the masses.  At any point in time, over 40,000 different securities are being bought or sold in the stock market. With billions of dollars in play every trading day, it can be a bit overwhelming to even consider investing in the stock market. The smartest plan of action is to learn about stock market trading to see if the stock market is the right market for you.

Back to basics

The best way to learn about stock market trading is to start at the beginning.  By breaking down the fundamentals of how the stock market works, you can get a better understanding of how the market operates.  Some of the following information may seem remedial; however, it’s never a bad idea to take a refresher course in the stock market.

Watch Wizetrade TV expert Angie Cervantes as she discusses the fundamentals of the stock market, including the different factors that may affect the price of a stock.

I’ll trade you 100 shares of IBM for 100 shares of Google…

When you think of “trading” something, you usually picture an even swap of one item for another (such as baseball cards).  Trading in the stock market is slightly different, however.  Instead of trading one stock for another, traders buy and sell stocks within their account.  Some exchanges (such as the NASDAQ) are completely electronically driven, while others (such as the NYSE) still employ actual “Pit Traders” to exchange securities.  Regardless of the exchange, the average trader simply executes buy and sell orders in his or her account.  Before you learn about stock market specifics, it’s good to review the types of trades you may encounter as an investor.

Some examples of common trades include:

• Buying a stock (or “going long”): This is when you purchase shares of a certain stock using the available cash in your trading account.
• Selling a stock: This is when you sell the shares of a stock you currently own in your account.
• Shorting a stock: This is when you sell shares of a stock you don’t currently own, because you think the stock will go down in price.  You are responsible for buying the stock at some point; hopefully at a lower price than you originally “sold” it for.  There are many rules surrounding short sales.
• Market order: This is when you buy or sell a stock at the current price in the market.  Your order, or request, will be filled quickly.
• Limit order: This is when you effectively name the price at which you would like to buy or sell a security.  For example, if IBM is currently selling at $80 per share, you could place a limit order to buy 100 shares if the price reached $70, and sell the shares if the price reached $90 per share.
• Stop Loss order: This order will protect you against a major loss in the value of a stock.  For example, if you purchase a stock at $70 per share, and wish to protect yourself against a major loss, you could place a stop loss order to sell the stock if the price drops below $65 per share.
• Day Limit order: This is a type of Limit order that is only good on the day you place it.  If the trading day expires, and the price of your stock does not reach the limit you wanted, the order is cancelled.  You must place another order if you would still like to purchase the stock on another day.
• Good-Till-Cancelled (GTC) order: This is a type of Limit order that will not expire until you cancel it yourself.  If the price of the stock does not reach the limit you wanted, the order will still stand until you cancel it.

Stocks, ETFs, Mutual Funds and more

The next step in learning about stock market trading is to learn about the different types of securities bought and sold on the exchanges.  Here is a short list of the types of securities you can buy or sell in the stock market:

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Common Stock The most typical type of stock found in the market.  Owners of common stock have voting rights, as well as the right to receive dividends. Preferred Stock Preferred stock holders do not have as many rights as common stock holders.  However, preferred stock holders receive dividends before common stock holders. Large Cap Stock Stocks of companies that have the largest “capitalization,” or market value, usually above $5 billion.  Large cap stocks typically provide small but steady returns. Mid Cap Stock Stocks of companies that have a market value between $1 billion and $5 billion.  Mid cap stocks may produce larger returns, but are riskier than large cap stocks. Small Cap Stock Stocks of companies that have a market value between $250 million and $1 billion.  Small cap stocks are more volatile than mid cap or large cap stocks, but also have the possibility of yielding higher returns. Mutual Fund A fund consisting of many different stocks, picked by a Fund Manager.  Mutual funds are typically used for diversification in a portfolio, and yield less risk than a single stock.  Mutual funds may be open- or closed-ended funds, and may carry an investing fee (or “load”). Exchange Traded Fund A fund consisting of many different stocks, which usually follows an index (ie the S&P 500).  ETFs have the diversification of a mutual fund, but the liquidity of a stock, and provide returns similar to the index they are modeled after.