On the stock market, wise investors can make money with a few simple rules. If you’ve thought of investing in stocks, but don’t know where to start, here are the basics.

What are stocks?

When you buy stocks, or shares, you’re buying part of a company. A company will offer a number of shares for sale. You can buy some, hold them as long as you like, buy more, or re-sell them.

Buying and selling is also known as trading. Once trading begins, the price of the stock can rise or fall.

Most stock is bought and sold at a stock exchange. Examples of stock exchanges are Nasdaq, the New York Stock Exchange, and the London Stock Exchange. You can also buy over-the-counter (OTC) stocks, which are not listed on stock exchanges.

You don’t buy and sell stocks yourself, but act through a stock broker or brokerage firm. Usually you make the decisions, and the broker represents you on the market. You can also choose to let the broker invest your money for you.

Read more in Investing
« An Example of Forex Trading
Market Corrections »

You might buy stock at a low price, and sell at a higher price to make a profit. Or, you might invest in companies that will pay regular dividends over several years, for a more stable flow of income. The stock you buy depends on your financial goals, and your personal investment style.

There are two types of stocks: common, and preferred.

  • Common stocks give you voting rights in the company. If you want to stage a hostile takeover, you would buy up as many voting shares in the company as possible. In general, common stocks give you a say in the way the company is run. Dividends fluctuate, depending on the fortunes of the company.

  • Preferred stocks return a fixed amount, with regular payments, but you have no voting rights. If the company has financial problems, the dividends on preferred stocks are paid before those of common stocks.

A company pays dividends in cash, or in shares. Taxes may apply to cash dividends.

Price of Stock

What determines the price of stock?

Broadly speaking, the price of stock depends on supply and demand. The more people buying the stock, the more its price rises.

The market price of a stock is not the same as its intrinsic (real) value. A stock price can rise, simply because other people are buying. People may buy in hopes of quick wealth, or because they have emotional ties to the product or service – or, just because everyone else is doing it.