John's Blog

Stock Trading journal of a Penny Stock Addict and sometimes Day Trader. Live vicariously through the ups and downs (and a lot of sideways here lately) of a Penny Day Trader. Add me to your favorites, because finding me once is a feat to be proud of, and twice without a link . . . a miracle

Friday, October 20, 2006

In response to a comment by wager witch, I'm going to try to demystify some stock market basics.

1. Every stock has a symbol, which is usually a series of capital letters, or for older compainies just one or two letters. For example MSFT stands for Microsoft, F stands for Ford Motor Company, AAPL is apple computer. Most online stock sites such as yahoo finance have a symbol lookup where if you know the name of the company you can find the symbol, or if you know the symbol vice versa.

2. Every stock has a fluctuating market price. It is usually expressed as a the "last" price (i.e. what the last person who bought it paid). More information is usually offered as bid and ask prices, the bid is what somebody is currently offering to buy it for, and the ask is what someone is currently offering to sell it for. The bigger the spread between bid and ask the less likely a buyer and seller will agree on a price so that both are willing to make a transaction (or that a third interested party will come in as a buyer). It sounds complicated but its really not, its an auction where the bidder is buying in hopes that somebody else will buy what he has bought for a higher price in the future.

3. To buy or sell stocks you need a broker. This used to mean a guy downtown in a fancy suit, but nowdays it often means a webite such as e-trade, ameritrade, scottrade, etc. The broker is going to charge you a commission for buying or selling stock, therefore to make a profit you need to have the stock you own move more than the amount you are going to pay for commissions. With my broker right now, I have to pay $9.99 when I buy or sell, or ~$20 to make any transaction on both sides, if I sell it when is worth more than $20 more than when I bought it . . . I make a profit. Thats all there really is to it.

4. Market prices change. To make all this work you have to understand that market prices change over time. This is how you make money, and what the charts are for. You want to buy low, and sell high. For example, a stocks price today is $1 per share, and I buy 1000 shares spending $1000 plus $9.99 (buying commission). A month from now the market price of that stock is $1.50 per share each share is worth half again as much as I paid for it, if I decide to sell, I make $1500 minus $9.99 (selling commission). I made a net profit on that transaction of $1490.01 minus $1009.99 or $480.02.

I hope that answers some of your questions, and feel free to comment if you have more questions.