Investing In The Stock Market

In order to understand the basic fundamentals of the stock market, you have to simplify. A "stock market" is simply that, a place that is either like the NYSE on Wall Street or NYSE Euronext which is electronically driven, but where stocks are traded by many different sellers. Stocks are traded "at auction" and prices are determined by supply and demand. So if demand goes up, the prices go up and if the demand slumps, so will the prices.

So what, exactly, are stocks? A share of stock is the smallest piece of ownership in a company which means that once you own stock, you have the right to vote on members of the board of directors among other things and if the company distributes profits or dividends to shareholders, you too will receive a share. A dividend is the way a company will distribute a portion of it's profits to it shareholders.

There are two types of stock: common and preferred with most stock held by individuals being common stock. Simply put, common stock is representative of the majority of stock held by the public, giving the stockholder the right to vote as well as the right to share in dividends. Common stocks also have value in that they are usually highly liquid and can be bought or sold on almost any day the markets are open.

Preferred stocks are a little different in that they have fewer rights than common stock but they pay more consistent dividends and preferred stock will get dividends first over common stock. Usually when investors look to buy preferred stock, it's because of its current income from dividends.

A stock sector is where the market is broken down into sectors where each company runs the same type of business making it possible to see how a stock is performing in relation to its peers. Market indexes such as Nasdaq Composite, the Dow and S&P 500 are essential to investing if you learn to read them correctly.

It's important to understand that not all shares of stock are created equally and if you don't intend to go with a full service brokerage firm, you should familiarize yourself with such terms as restricted, float, authorized, outstanding and treasury shares. Each of these terms have different attributes and can affect your ability to make an informed decision before jumping into the market.