Stock Market Basics Tutorial

The stock market is not mysterious in its fundamental workings. A small amount of time spent learning the basics can get you started on a lifetime of prosperous investing. Even seasoned investors periodically remind themselves of the way stocks function, because sophisticated strategies don't always do better than simple, straightforward stock market investing. School yourself on the basics and keep them in mind as you get smarter about the markets.

Shares

Companies offer to sell the public shares of their stocks. They are called "shares" because you actually own a share of the company when you buy its stock. For example, Bank of America offers shares. The stock symbol is BAC. Bank of America decides how many shares it wants to make available in an initial offering. After that, the only shares available are the ones other traders decide to sell. You can buy shares of BAC, as long as someone else is selling them. If there were a per-share price of $12 for BAC, you could by 1,000 shares for $12,000. Sometimes a company will offer a second round of shares, but that is rare. Usually the supply is limited to the number of shares he company originally offered.

Gains

You can keep your stock for as long as you want, whether you hold it for a day or a decade. When you decide you don't want it anymore, you can sell it. If you bought BAC for $12, and you check the stock price one day to find it is worth $20 per share, you may decide to sell it. That means you would make a profit of $8 per share. If you have 1,000 shares of BAC that you bought for $12 per share, you spent $12,000 when you bought them. If you sell your 1,000 shares for $20, you get $20,000 from that sale. Subtract your original $12,000 investment, and you see that you made $8,000 profit.

Losses

You can lose money on a stock. If you buy BAC for $12 and it drops to $6 per share, you do not have to sell it, but if you do sell it at that price, you lose $6 per share. If you own 1,000 shares, that means you lose $6,000. Your original 1,000 shares would have cost you $12,000, and you would have sold them for $6,000. You have the choice of holding on to the stock to see if the share price eventually comes back up and gives you a profit.

Stock Exchange

You buy and sell your shares through a stock exchange. For example, some stocks trade on the New York Stock Exchange, but others trade on the NASDAQ. People used to physically go to a stock exchange and "exchange" stocks, but today this is all done electronically. You must have a broker to represent you on the stock exchange. You can get a broker by going to a brick-and-mortar office where a broker does business, or by signing up online with a discount broker. Brokers charge you for each trade you make. An in-person broker can charge as much as $150 per trade. Online brokers charge from $4 to $15 per trade. Your broker will send your offer to buy or sell shares to a stock exchange. Another broker who represents another investor will take your offer.