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What are stocks
By Yinon Arieli
Investing in stocks is not an easy task. However,
understanding some fundamental concepts, such as what stocks are, how their
price is determined, how to trade stocks and other issues can get you on track.
We suggest that you read on and learn about the above topics.
What are stocks?
About a year ago, a small company named Cocola (don’t scratch the back of your
head, it’s an imaginary company), decided to produce a soft drink like Coke but
much tastier. It became a hit right from the start. The fast growing demand for
the new beverage, required building an additional plant to increase production.
Unfortunately, the company can’t afford to spend large amounts of money, leading
the managers to consider request a loan from the bank. However, they figure out
that it will take years to pay back the entire loan, not to mention the high
interest payments. They therefore decided to look for another option.
A good way to raise the capitals needed for the constructions would be to offer
a part of the business to the public, or in other words- for investment in the
business the public can become a partner. This can be done by offering some of
the company’s shares (also called stocks) to investors through the stock market
(like the NASDAQ), also known as Exchange. Each investor pays the company for
the amount of stocks that she is interested (and can afford) buying, and in
return she gets a fractional ownership of the business. If for example you are
one of the company shareholders, and you bought 5% of its stocks, you now own 5%
of the business and if the company is profitable you are entitled to 5% of its
dividends (the excess profits that the company chooses to distribute among its
shareholders).
How
stock trading works
The company decides to issue stocks or “go public”. After the company goes
public, by a procedure called Initial Public Offering (IPO), its stocks are now
traded daily in one of the exchanges in the stock market, like the NASDAQ, AMEX,
NYSE, or other exchanges around the globe. Shareholders can offer new investors
to buy their piece of the business by selling them part of their stocks. The
negotiation between the two sides is carried out through computerized system
activated by the brokers, who are individuals or firms that charge commissions
for executing investors buy and sell orders. If there is a match between the
seller and the buyer offers, the order is executed. In this case, the seller
gets the cash for the sell while the buyer receives the seller’s stocks. The
buyer now owns a share of the company, equal to the percentage of stocks she has
relative to the total number of shares the company has issued.
The bottom line is seems simple: buy low, sell high; buy your stocks at
relatively cheap price, wait for the price to rise, and sell at the higher
price. The difference between the price you paid to buy and the price you
receive when you sell is your profit. The most important question is how to make
this profit large as possible. First we have to understand how the price of a
stock is determined.
What determines the price of a stock
Stock prices are determined by a combination of factors that no analyst or other
market expert can consistently predict. In general, the prices reflect the
long-term earnings potential of companies. Investors are attracted to stocks of
companies they expect will create substantial profits in the future. Therefore,
many people wish to buy stocks of such companies, raising the demand for the
stocks, leading their prices to rise. On the other hand, investors hesitate to
purchase stocks of companies that present prospect for poor earnings. Because
fewer people wish to buy and more wish to sell these stocks, demand is low and
prices fall down.
On the short term, stocks tend to be very volatile, especially due to today’s
instantaneous availability of easily-obtained large amounts of online
information. Economic events, company-specific news and even the illogical whims
of investor sentiment can send the stock price into various levels of turmoil
and celebration every day.
Picking winning stocks
Stock trading is about trying to figure out what will be the future price of a stock
in the next hour, day, week, quarter, and even 15 years from now. Since this is
not an easy task, how can you choose the right stocks, those with the potential
for highest price increase?
This could be a complicated task. Each investor has his own techniques to search
for the winners. Some investors, so-called value investors, consider the general
business climate and outlook and the financial conditions and prospects of the
individual companies in which they consider investing. They also try to analyze
whether stock prices relative to the company’s earnings already are above or
below acceptable norms. Other investors use technical (analysis) methods which
rely in part on the trend in swings of the price to predict mainly its
short-term future behavior. There are many other methods as well.
No matter what fishing rod you use to catch your winning shares, keep in mind
that other people also have the same raw data that you have. However, their
analysis could lead them to the opposite conclusions, and while you may wish to
buy, they may decide to sell and vice versa. Unfortunately, their conclusion
could be right, and yours could lead to a loss.
So, why go the hard way, when you can do it the Yalicoo way!
The Yalicoo way
In Yalicoo, you can learn and practice various
stock trading techniques, read relevant
news at one place, build diverse portfolios with almost unlimited number of
shares from various exchanges, and test your decisions with real time quotes. In
addition, you have excess to all portfolios of other investors who participate
in the simulation, giving you the opportunity to learn and understand new ideas
from top experienced stock pickers.
And that’s not all; you can also win cash prizes up to thousands of dollars.
Check out what TigerTom, 3 times in a row Yalicoo’s daily game winner from last
week, has to say:
"a few weeks ago I didn't know anything about the stock market. I started
reading Yalicoo's tutorials, and follow the leading players. Just a couple of
weeks later, I already have the knowledge and experience required to become a
great stock picker in the games. Along the way, I won Yalicoo's daily game 3
times in a row and earned 3000$ ! Today, I continue playing Yalicoo, but now
other players are trying to learn from me..."
Don’t just dream of becoming a successful investor in the
stock market; Don’t go
the hard way; choose the Yalicoo way and join the growing community of winners.
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