Understanding the Stock Market and Ways of Making Profit

Understanding the Stock Market and Ways of Making Profit

The first and important step in understanding the stock market is to know what stocks are. A share is the smallest unit you can own in a company. If you have purchases shares of a certain company then you are part owner of that company. In most cases, you have the right to vote on members in the board of directors and the mode in which company matters are handled. When the company makes profit, you will be given profit or what is commonly called dividends, which is proportional to the shares that you have in the company. One of the main features of stock ownership is limited liability, in case the company has a lawsuit and must pay huge sums of money, the creditors cannot come for your personal assets since the company is listed a limited liability company. In this context, it means that the creditors can only take what belongs to the company and not what belongs to the shareholders.

The stock market is a wide sector that has numerous categories, before you can make up your mind to invest in any industry it is imperative that you know that the dynamics that are involved in the industry. There are different types of stocks and if you want to know what is the stock market and how to profit from it, it is vital know the different types of stocks before investing. Several companies have devised various techniques of classifying the stocks in order to make it easy for the investors to choose the appropriate stock according to their investment objectives. On the other hand, classifying stock is a technique that various companies use to ensure that they remain in control of the major shareholding of the firm. Stocks are classified into two major categories preferred and common stocks.

Types of stocks

Most companies use their market capitalization as a measure of classifying their stock. Market capitalization refers to the value of the company in terms of assets and liabilities. Shares are often divided into small cap, mid cap and large cap. Small cap and medium cap are those firms with a projection of future expansion and their stock prices will often fluctuate. On the other hand, large cap refers to companies that are more established and the stock price is mostly stable. The different classes of stocks include

Sector stocks: These types of stocks are classified into various categories depending on the type of operation the company is involved in. The common classes include energy, healthcare, technology, financial, transportation, capital goods and communication services. The industries mentioned are cyclic while consumer products and utilities are defensive sectors. 

Cyclic stocks: These are stocks in which performance largely based on the business cycle. The prices of the stocks usually vary and it depends on the market demand. The simple law of supply and demand applies in this scenario, when the demand is high the price per share rises, and when the supply is high the price of the share drops.

Defensive stocks: On the contrary, this is the exact opposite of cyclic stock, and they are popular for their consistent performance even during poor economic periods. These types of stocks are offered by companies’ whose products and services are steady throughout the year; therefore enjoy a stable income regardless of the economic situation. 

Tracking stocks: this type of stock depends on the performance of the firm’s subsidiary and in most cases; the performance of the sub sectors determines how the price share will prevail in the market. It is imperative to understand that trading stocks shareholders have no voting rights in the company. Most firms will resort to trading stock when they feel that the class of goods or services is performing optimally and will be profitable over years.

After understanding what is the stock market and the different types of stocks, one of the most common question most investors will ask is how to make money from stock trading. There are various aspects that must be kept in consideration for one to make profit in the stock market. Some of the techniques of profiting from stock market include 

a. Trade on fast moving trends. The stock market prices changes considerably over time and trading on fast moving trends allows you to make profits quickly and reinvest back after you have received your initial investment.

b. Buy stocks that show promise. This is the second and most important rule in stock market, you are required to buy stocks that are trending higher and fundamentally sound good. This gives you an opportunity to put your money where safety is likely to be guaranteed.

c. Use a proven signal. Whether the stock you want to buy is trending or has a quicker cycle, always uses signals that are proved this increase the chances of you making profit.

d. Confirm the trend. You can confirm the trend of the stocks by picking 30-period simple moving average charts, and never buy stocks that trade below the par 30.

e. Take profits accumulated. When trading it is imperative to note that, you have to take the profit to reduce the amount that is on table. This reduces the risks of your cumulative funds undergoing depreciation when the share price reduces.