Some people have a good understanding of trading stocks, but others are often confused by it. What you need to understand is that it isn’t magic. You have to study the market and study the companies that are selling the stocks. You will be owning part of a company and your financial success will be tied into whether or not that company can make a profit. Here are some more basics that you need to know about stock trading.

What are Stocks?

By selling stocks, companies are able to build their investment capital. The buyer is investing their money in the company right now in hopes that the company’s future profits will reap big dividends for the investor. When the company selling the stock is profitable, it’s a win/win transaction for both parties.

How do Stocks Trade?

There are two ways to buy and sell stocks. There’s electronic trading and the floor exchange. Floor trading is still the most widespread method of trading stocks, but there’s still a lot of electronic trading going on. They both work under the same concept, but the way the transactions take place are a little different. Here are the basic differences between floor exchange and electronic trading.

Floor Exchange: I’m sure everyone has seen the frenzied activity on the trading floor in the movies depicted by a very chaotic scene with hundreds of people shouting and gesturing to each other frantically. The way a trade works on the floor goes like this. The buyer calls his broker indicating that he would like to purchase 100 shares of Company A. The broker relays that information to the floor clerk, who knows exactly who is selling 100 shares of Company A. A price is agreed upon and that price is communicated to you. You will then get confirmation of the purchase through the mail and you now own a piece of Company A.

Electronic Exchange: With electronic trading, the steps are the same except that buyers and sellers are matched up online and communciation is immediate. You’re actually a step closer to the trading floor, although a broker still handles the electronic transactions. The stock that you buy, once again, gives you a piece of ownership in the company.

Why Trade Stocks?

With thousands of stocks being traded on a daily basis, there are also thousands of reasons that people trade. While some people trade in hopes of making a profit from their investments, others may consider it to be an enjoyable past-time, and still others just want to own a piece of the company that they are buying stocks from. Trading stocks gives you insight into how companies grow and develop and into how the government regulates commodities. Trading stocks can provide an additional income source or a primary income source if the investment pans out.

To learn more about trading stocks, do some research in the newspapers or online. Watch the markets and do some tests by “investing” imaginary money. Keep track of your pretend investment until you are comfortable with the process and want to start trading through a broker for real money. Start out slow and learn before you invest a lot of money.