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Stock Market Basics – Stock Market Definitions

Stock Market Basics

Before investing in the stock market, it is vitally important to first understand stock market basics, such as:  what is a stock?, what is the stock market?, how are stocks traded?  Understanding stock market basics will help an investor make sound investment decisions.

A Stock is a financial security that is sold by a corporation that represents a share or fraction of ownership in a corporation.

A Dividend is a cash payment made by a company to owners of their common stock, and is paid out based on the number of shares held.  A dividend can be a regular periodic payment based on earnings or a one-time special payment from a cash surplus generated from business activities, such as the sale of a company division.

The Stock Market is a collection of stock trading markets, which themselves are comprised of thousands of individual stocks that trade on various stock exchanges and stock quotation systems.

There are three major Stock Market Indexes that are used to gauge stock market performance, including:  the Dow Jones Industrial Average, the NASDAQ Composite index and the Standards and Poors 500 index (S&P 500).  These indexes are comprised of companies that are selected based on their representation of segments of the economy.

To buy or sell stocks, one must have a Brokerage Account.  A brokerage account is an account that an investor opens with a licensed brokerage firm that an investor can use to place orders to buy and sell stocks.  The licensed brokerage firm represents an investor in the stock market, and executes an investor’s buy or sell orders based on the instructions from the investor.

There are two basic types of stock buying and selling orders that can be executed from a brokerage account:  a Market Order and a Limit Order.  A Market Order is an order to buy or sell a stock at the current price that is available at the time the order is sent from the licensed brokerage firm to the exchange or trading platform on which a stock trades.  Since stock prices can fluctuate considerably, even over a matter of seconds, an investor that uses a market order has no control over the price at which their stock purchase or sale occurs.  The advantage of using a market order is that the order to buy or sell a stock will occur, regardless of price.  A Limit Order is an order to buy or sell a stock at a set price.  Although a limit order guarantees the price at which a stock transaction will occur, the disadvantage of using a limit order is that there is no guarantee that a stock will be brought or sold if the limit price that is set is not reached during trading in a stock, and as a result the buy or sell order may not be executed.

Stock Market Basics –Basic Stock Market Investing Strategy

Understanding stock market basics includes understanding the basic stock market investment strategy of buying stocks low and selling stocks high.  Everyone invests in the stock market to make money, and to do so you have to buy when a stock is low and sell it when it is high, which can include buying a stock that is already a high flyer and selling it even higher, as a company’s revenues and earnings grow.  To learn more about stock market basics, see:  Stock Market Advice – Definitions and Strategies, How to Play The Stock Market, and Advice on Stocks – Definitions and Valuation Methods.

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