So a number of people have asked me multiple times how I trade stocks and how to make money doing it. First of all I want to say that it’s not a get rich quick kinda thing and its not quite like the kind of stuff you see in the movies. Its actually quite slow and not the frantic yelling you saw in like “Trading Places”. All your trades will be done with a computer so things are much less dramatic, but just as satisfying.
So Brian, how does the stock market work? What do all those numbers mean? I don’t understand why it matters if the down is up 20 or down 300?!
First of all lets talk about how it all works. The stock market is exactly that, a market place for stocks. What is a stock? In the simplest terms, owning a stock means that you own a part of that company! Now a company may have millions, or hundreds of milions of shares, so don’t buy 10 shares of McDonalds and expect to get free Big Macs on one of your drunken nights out.
So the “game” as alot of people refer to it as (and how I like to view it) is all about buying these small portions of companies and then turning around and selling them to someone else for a higher price. If you buy a stock at a certain price and for some reason it becomes desirable (usually because that company is going to make a lot of money) you can sell it to someone who is willing to pay more to own your part. So to explain what the numbers mean, those are literally how much more that stock is selling today than yesterday. So if something is up by 3.5, that means a stocks asking price by the end of the day is $3.50 more than when the day started. So if a 10 dollar stock is up 3.5, that means by the end of the day, you can sell it for $13.50. You don’t have to worry about where to buy or sell it, because computers match up and do all the buying and selling.
It’s important to also think about the points relative to the price of the stock. A low priced stock like Bank of America, which trades around 8, being up 3 is a huge deal. Something like Apple (think Macbooks and Ipods) which trades closer to 400, being up 3 bucks a share isn’t a big deal. That’s the difference between making 30% on your investment and making 1%.
So now you know roughly how the stock market works. In the coming weeks I’ll explain more things about the markets and maybe some of the buzz words you’ll hear when you watch CNBC or other business shows.