What Is Stock Trading and How Does It Work?

First a stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.

Stock trading is done at an exchange, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. The other type of exchange is a virtual kind, composed of a network of computers where stock trading is done electronically.

A stock market is nothing more than a super-sophisticated farmers market linking buyers and sellers. You can use a broker for stock trading who act as a "market maker" for various stocks. They may match up buyers and sellers directly but also maintain an inventory of stocks to sell to other stock trading parties.

If you are new to investing online, don't put your entire life savings into an online account. Start with a smaller sum, which will be easier to handle and keep track of. Once you feel confident, you can then decide to add more money to your investing online account.

Once online, many investors tend to concentrate on stocks, specifically large-cap domestic stocks. While these stocks should make up part of your portfolio, they shouldn't be ALL of it! Take into account your time horizon and risk tolerance to develop a well-balanced portfolio of stocks, bonds, and cash.

If you're new to investing online and are looking to open a brokerage account, there are some important facts you should know before choosing a broker. Each one has strengths and weaknesses, but not everyone sees a broker in the same way. For example, if you're comfortable finding your own research for investing online, then the deep discount brokers will work well for you.

Ask yourselfÂ…

What services are offered? Do they have research available? What is the cost to you for investing online? What are the real commission costs to do a trade, including any handling fees? How are confirmations sent to you -- by e-mail, by snail mail, by phone? Can you enter orders by phone, by e-mail, directly on-line? Does it cost extra to call and talk to a broker for help with your account?

Spreading risk is critical to long term success in stock trading. If you have invested your entire savings into one company and that company’s stock falls by 50%, you have lost half your savings in one go. If you have spread your risk by investing in 4 companies, and one of the companies stock falls by 20%, you only lose in one area. Spreading risk assures you that if a stock goes down you have others to balance your situation.