by Ken Burnside

Created on: September 03, 2008   Last Updated: September 16, 2008

Stock Market Basics

There are no stock market secrets; instead, there's a cornucopia of knowledge out there on how to buy, sell and manage stock portfolios. Anyone trying to sell you stock market secrets is attempting to prey on your ignorance. To help you get a start in stock market investing, let's cover a few terms on the quick.

First, companies sell shares of stock to raise investment capital; if the company is profitable, each share of stock gets a proportion of the profit. There are complicating matters (like voting shares, nonvoting, shares, preferred stock and common stock), but the basic principle of owning a share of stock is that you get a share of what the company earns every quarter.

The other prime factor in owning stock is its price. Stock prices reflect what the stock market trading bourses think the stock is currently worth. A company with a new, hot product release will generally have its price increase, while companies suffering from a scandal, or failing to meet projected earnings, will have their price sink. (There are other factors that alter this, ranging from companies writing down expenses for bad acquisitions dropping share prices, companies that cut costs usually by letting go of employees having their prices rise, and more.)

If you divide the price by the estimated earnings, you get the price-earnings ratio. This is the number of quarters that the stock would need to pay you its dividend to give you enough money to buy a share of that stock; in general, you can assume that a price-earnings ratio of higher than 32 (meaning it takes 8 years of steady dividends to earn out the purchase price of the stock) is overpriced for a long term hold, but it may be work buying if you think you can sell it rapidly for more than you paid for it.

Those two choices are the fundamental ones in doing online trading and stock market investing: Whether your strategy is to buy and hold, or to buy and re-sell for a quick profit. Which strategy makes the most sense depends on what kind of lifestyle you lead and how much effort you want to put into it. If you're doing a buy-and-sell on short time frames, you'll be interested in the latest hot stock tips, but may not care too much about what the companies you buy actually make; Warren Buffett, the richest man in the world, feels that this is irresponsible and unethical you should investigate what the companies you invest in make, and what they do, and buy and hold for the long term.

Online stocks and other tools for handling stocks and bonds, have a built in bias for buy and trade rapidly, because the companies that offer those services make the bulk of their money from fees and commissions based on each transaction. That's the single most important stock market tip your broker's interests may not be the same as your interests. Keep that in mind when you do any kind of online trading or stock market investing.

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