by Adhvith Dhuddu, Collegiate Times Regular Columnist
Wednesday, August 29th, 2007
There is no better way to understand how the markets work than to open a trading account and dabble around with a few hundred dollars (not play money). The knowledge that one can gain by doing this is immense and will compound going forward. But to the novice, stocks, futures, options and commodity markets appear complicated and out of reach. Understanding basic aspects of how they function will greatly help in making a decision to start investing early. Starting early tremendously helps improve ones general knowledge about the economic and financial health of a country (or company) and also gives an exposure to how corporate America functions.
When a company wants to raise money there are three primary ways of doing it: borrow money from the bank, issue bonds in the bond market, or issue stock in the stock market. The company decides to issue stock and then approaches, say, Merill Lynch, and asks to help them out. Merill Lynch agrees and they are called the underwriters for the stock. Merill Lynch provides this company the $10 million they need (in exchange they get proportional control) and turns around, slices them up into two million shares of five dollars each and sells them to brokers, investors and other banks (the public). The stock of this company is officially in the public, has been listed as a public company in a stock exchange, and can be traded. This whole process is called the initial public offering or IPO.
As most people are aware, the main stock exchanges in America are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ) and the American Stock Exchange (AMEX). Note that the Dow Jones is not a stock exchange, it's only an index. These are the exchanges where you can buy and sell your stocks through your broker (there are mainly two types of brokers the discount brokers and fully functional brokers). The reason you buy and sell through your broker is because he or she is a member of the exchange and you are not. To become a direct member of the exchange you should be willing to shell out a few million dollars.
Think of the stock market (or the futures, options and commodity markets) as an automobile. Your car has different parts (engine, tires, etc.) and runs on a fuel. Similarly, these markets have different parts (the exchanges, the companies listed, the brokers, the Securities and Exchange Commission, etc.) and run on a fuel called money. If the day money dries up on this planet, these markets will cease to exist.
But why and how does the stock price go up or down? In the business world, a year is referred to as a "financial year," and the financial year varies for different companies. For example, GAP's financial year starts May 1 and ends April 30 and ExxonMobil has its financial year lasting from Nov. 15 to Nov. 14 of the following year. Each financial year is divided into four quarters of three months each. Publicly listed companies release their earnings report for each quarter on a pre-specified date. Stocks experience extremely significant movements the day the earnings report is released. This is one event that moves the stock price considerably depending on the earnings report and the company's outlook in the coming quarters and financial years. Also, extremely heavy buying and selling of a particular stock by a mutual fund, pension fund (your 401(k) and IRA money) or a hedge fund can significantly impact the price of the stock.
One must understand that the primary driver in the movement of the stock price is the supply and demand relationship. If the stock has increased demand and less/constant supply (i.e. more people willing to buy a stock and lesser number of people willing to sell the stock) the price of the stock moves up. On the contrary, if there is less demand for the stock (i.e. less people want to buy the stock) and more/constant supply (i.e. more people willing to sell the stock), the price tends to go down. Therefore, when the above mentioned funds buy and sell stocks, a significant imbalance in the equilibrium of supply and demand is created (because these funds buy and sell in hundreds of millions of dollars) driving the stock price up or down.
You can sit in a class and learn about swimming all day, but when you dive into the water you pretty much forget everything you learned and start again. Similarly with the stock markets, taking the initial plunge is important and learning about investing/trading will follow. You drive your car and follow certain rules (stop on red, go on green, etc.), likewise, following rules while trading and investing will put you on track for financial success. Once you've understood basic concepts, opening an account is hassle-free. Online brokers like Scottrade, ShareBuiler and Zecco are extremely customer friendly and will help you along the way.
Online link to this article:
http://www.collegiatetimes
Wednesday, August 29th, 2007
There is no better way to understand how the markets work than to open a trading account and dabble around with a few hundred dollars (not play money). The knowledge that one can gain by doing this is immense and will compound going forward. But to the novice, stocks, futures, options and commodity markets appear complicated and out of reach. Understanding basic aspects of how they function will greatly help in making a decision to start investing early. Starting early tremendously helps improve ones general knowledge about the economic and financial health of a country (or company) and also gives an exposure to how corporate America functions.
When a company wants to raise money there are three primary ways of doing it: borrow money from the bank, issue bonds in the bond market, or issue stock in the stock market. The company decides to issue stock and then approaches, say, Merill Lynch, and asks to help them out. Merill Lynch agrees and they are called the underwriters for the stock. Merill Lynch provides this company the $10 million they need (in exchange they get proportional control) and turns around, slices them up into two million shares of five dollars each and sells them to brokers, investors and other banks (the public). The stock of this company is officially in the public, has been listed as a public company in a stock exchange, and can be traded. This whole process is called the initial public offering or IPO.
As most people are aware, the main stock exchanges in America are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ) and the American Stock Exchange (AMEX). Note that the Dow Jones is not a stock exchange, it's only an index. These are the exchanges where you can buy and sell your stocks through your broker (there are mainly two types of brokers the discount brokers and fully functional brokers). The reason you buy and sell through your broker is because he or she is a member of the exchange and you are not. To become a direct member of the exchange you should be willing to shell out a few million dollars.
Think of the stock market (or the futures, options and commodity markets) as an automobile. Your car has different parts (engine, tires, etc.) and runs on a fuel. Similarly, these markets have different parts (the exchanges, the companies listed, the brokers, the Securities and Exchange Commission, etc.) and run on a fuel called money. If the day money dries up on this planet, these markets will cease to exist.
But why and how does the stock price go up or down? In the business world, a year is referred to as a "financial year," and the financial year varies for different companies. For example, GAP's financial year starts May 1 and ends April 30 and ExxonMobil has its financial year lasting from Nov. 15 to Nov. 14 of the following year. Each financial year is divided into four quarters of three months each. Publicly listed companies release their earnings report for each quarter on a pre-specified date. Stocks experience extremely significant movements the day the earnings report is released. This is one event that moves the stock price considerably depending on the earnings report and the company's outlook in the coming quarters and financial years. Also, extremely heavy buying and selling of a particular stock by a mutual fund, pension fund (your 401(k) and IRA money) or a hedge fund can significantly impact the price of the stock.
One must understand that the primary driver in the movement of the stock price is the supply and demand relationship. If the stock has increased demand and less/constant supply (i.e. more people willing to buy a stock and lesser number of people willing to sell the stock) the price of the stock moves up. On the contrary, if there is less demand for the stock (i.e. less people want to buy the stock) and more/constant supply (i.e. more people willing to sell the stock), the price tends to go down. Therefore, when the above mentioned funds buy and sell stocks, a significant imbalance in the equilibrium of supply and demand is created (because these funds buy and sell in hundreds of millions of dollars) driving the stock price up or down.
You can sit in a class and learn about swimming all day, but when you dive into the water you pretty much forget everything you learned and start again. Similarly with the stock markets, taking the initial plunge is important and learning about investing/trading will follow. You drive your car and follow certain rules (stop on red, go on green, etc.), likewise, following rules while trading and investing will put you on track for financial success. Once you've understood basic concepts, opening an account is hassle-free. Online brokers like Scottrade, ShareBuiler and Zecco are extremely customer friendly and will help you along the way.
Online link to this article:
http://www.collegiatetimes
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