Stock Trading Education: A Primer For the New Investor

The stock market can be scary for any new trader.  There are lots of complexities and puzzling terms that may lead to problems (not to mention reduction of capital) for anybody trying to acquire stock trading education.  So….what should an individual do to guard themselves while learning the fundamentals of the market?

My guidance would be to study this article, digest the information, and then put it to practical use.

This stock trading education article covers the process of buying and selling shares, and clarifies the basic issues of exactly how investors gain or lose money in the market.

As you’re most likely aware, a share of stock is in fact a portion of a company. You, me, and the rest of the stock holders are the actual owners of the business. So when the business makes money, theoretically the owners (stock holders) share in the earnings.  Unfortunately they also (at least indirectly) share in the firm’s losses as well.  

The following are the basic steps involved in the trading of stocks.  This really is the critical component to any stock trading education course:

The first step is to establish an account with your friendly broker and make an initial deposit.  Then again, should you feel comfortable, you can establish an account at a self-trading website like Scottrade.  Obviously you need to bear in mind that self-trading companies provide no advice, and little to no support. Any stock trading education that you require will need to be obtained from a different source.

 For purposes of illustration, we’ll begin with a make believe thousand dollars.

1.We will use 3M as an illustration.  You reveal your desire to your stockbroker, who looks up 3M (MMM).  He punches MMM into his estimate request program and asks for the current market price (supplied by the New York Stock Exchange) which is $81.18. He makes clear to you that at $81.18, your thousand dollars will buy 12 shares, with a little left over

2.You put in a bid with your broker for ten shares at the current market price.  Your broker will bill you something in the neighborhood of $30 (does that seem excessive to you?). Your broker will then enter the order, and after that he will determine the precise price you will be billed for those 12 shares.  Here is the math: twelve (the number of shares) times $81.18 (the present price for the shares on the open market) for a total of $974.16, plus $30 (the broker’s commission, do not forget he’s got to eat too), for a grand total of $1004.16.

3.At this point the genuine fun begins.  Mysteriously, your broker magically finds somebody prepared to give up his shares at the current market price of 81.18. Your broker will then debit your account of the required money and dispatch it to the seller. Of course your broker also takes his $30 commission out of your account as well. It is as straightforward as that!  You have performed your very first trade, having a minimal amount of stock trading education under your belt.

4.The next day, 3M shares go up to $82.18. Cool…you just earned twelve bucks!  Obviously this really is a paper gain at this stage.  You do not actually have the money in your pocket, and you don’t have to pay taxes on it as yet.

5.One week afterwards you choose to sell your position in 3M after noticing another increase in stock price. You place a sell order at market ($83.18).

6.Once again your broker performs a miracle.  He discovers a buyer for your stock  at the present price, and finishes the sale to them. The deal netted $998.16 for your stock, but you don’t receive that much. In actuality, your broker gets to take another $30 out of your account.  As it turns out, you will end up getting $968.16 in your account a few days later.

7.OK, now it’s time to calculate the score. Your stock went up in value while you kept it, so you ought to be showing a decent profit for efforts. Regrettably, the profits are nonexistent.  Your preliminary investment of $1,004.16 turned into a balance of $968.16. Obviously you need additional stock trading education!

8.Fast forward to April 15 of the next year. There might be some good news coming out of this recent loss. There’s a short-term capital loss of $36 as a result of your initial adventure in the marketplace of stock market investing. You can most likely deduct the loss from your gross income, depending upon your current scenario.  It is advisable to seek advice from a tax professional on this topic.

Hopefully this write-up clears up any confusion about the basics of stock trades and also the value of stock trading education.

Summary:  You ought to consider trading larger amounts of shares per transaction.  

As a comparison, lets observe what would have occurred had you purchased a larger quantity of shares.  Assume you acquired 50 shares of 3M at the the same price of $81.18 and sold them at $83.18.  Rather than losing money on the transaction, you’ll realize a profit of $70.  Clearly this demonstrates that commissions are a large burden to the little investor.  However, if buying large numbers of shares just does not fit in your budget, then possibly you ought to think about alternate options.  Either no-load mutual funds or direct investment plans (DRIPs) might be beneficial alternatives.  However, that is a discussion for another day.  

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