Understanding the Investment in Stock

Understanding the Investment in Stock

Submitted by adil on Tue, 11/25/2014 - 14:21

It is an undeniable fact that investors and traders have been trading stocks for hundreds of years, but, fresh investors and stock traders, and sometimes even the experienced traders, do not have enough knowledge about placing profitable trades in the market, as they are not familiar with the parameters and are unable to identify the mechanism that will help them generate profits.

However, stock trading still works the same way as it did centuries ago. The only difference is that now more markets have been introduced and the structure is a bit complex. Online trading has minimized the time it takes to execute a trade and produce results. It has opened new avenues for traders, who can now trade from different regions on various foreign exchange currencies. In order to understand stock trading, let’s discuss it in more detail.

Issue Shares (Stocks) or Borrow from Financial Institutions

When businesses need funds, they can choose from two modes of finance. They can either take finance from a bank, or they can issue shares to the general public to raise finance in exchange of the ownership of the business. The ownership of the shareholders is limited to the amount of shares they hold in a company, along with the right to vote in the meetings to select the management of a company. But holding shares in a company does not entitle a shareholder to run how things work in managing the business. All they can do is vote in the general meetings to elect the board of directors, or make small changes in a business structure. However, the individual vote carries less weight, especially if there are a large number of shareholders of a company.

Nonetheless, it is the ownership structure of a business that determines the stock value or stock price, because if the shareholders are not entitled to earn on their investment, then share certificates do not have any worth. With the passage of time, companies and businesses grow, and with that growth, the value of stock also increases. This is how stock trading works.

Average Increase of 10%

After the New York Stock Market crashed in 1929, the value of shares started moving in an upward direction again, and regardless of other crashes that followed, the average stock is back to 10 percent a year. But like any other investment option, these certificates do not guarantee profits. When you invest in the stocks of an established business, you will probably earn substantial profits if you don’t sell these shares during the time it suffers a temporary loss. Many shareholders take hasty decisions when the market goes down, and end up selling their shares with a fear of suffering losses, but what they don’t know is that hasty decisions often end up in losses. Instead, they should wait for the shares to recover in value, because when it does, they secure high profits on their shares.

Whenever you trade stocks, the possibility of bull and bear market is always there, and a key to successful trading is to manage time and have a lot of patience. Equity trading can be a long term trading option for investors, but in order to enjoy high returns, they must learn to go through the pain of bearish trends that sustain in the market for quite some time, before the market starts showing bullish trends that eventually last for a great amount of time.