I figured I’d borrow the oft-used title of books for beginners. My focus in this article is to discuss the very basics of stock market investing. We’ll pretty much go a mile wide but an inch deep.

What is a stock
A stock is a share of ownership in a company. In this article we’ll be focusing on public companies, but the same principle basically applies to private companies as well.

As a part owner (you might own one millionth of the company, or one hundredth of the company, depending on how wealthy you are), you have certain rights. One of the rights you have is to vote each year for the Board of Directors. The Board of Directors represents the shareholders’ best interest (hopefully) and holds management accountable to do those things with the company that will maximize shareholder value.

As a shareholder, or part owner, you are also entitled to dividends - profits of the company. If you own one share, and the company has 10 shares outstanding, you own ten percent of the company. If management decides to issue a dividend (distribute corporate profits to shareholders) of $1000, you will receive ten percent of that, or $100.

If the corporation carries debt, and it files for bankruptcy, the creditors are first entitled to be paid. In this way, when you own a share of a company, your investment could (hypothetically) go up infinitely, but can only go as low as zero.

While you used to actually own a stock certificate that you might keep in a bank safe deposit box, today only the information is stored. You don’t actually receive a piece of paper representing the shares of a company that you own.

How are stocks traded?
Stocks are traded on exchanges. One exchange that is very familiar is the New York Stock Exchange, or NYSE. The NASDAQ is an exchange for technology stocks. These exchanges are part of the secondary market - where buyer A purchases shares from seller A. A primary market would be where buyer A purchases shares directly from the company in an initial public offering (IPO).

Whenever a stock is sold, there is a buyer on the other end. Many times people think of selling stock as simply “cashing out” - while that may be accurate, you must rememeber that there must always be a willing buyer to take your shares at their market value.

How are stocks priced?
Stock prices change through basic supply and demand. If stock A is $10, but there is a sudden surge of demand for it, people will be willing to pay a higher price. Perhaps the increased demand brings the stock’s price to $12. On the flip side, if there is a lot of shares being sold (supply, or availability of those shares), the price will decline. Think Tickle Me Elmo. The price went up because the “market” demanded it. There was no other rational reason for it.

What a stock price really comes down to though, is what investors feel the company is worth. That is the key. The number that drives a stock price (in the long run) is its earnings, or profit. So investors can look back historically and see the earnings a company has managed to attain in the past. Using this historical knowledge, they will forecast what they think earnings will be in the future.

Forecasting earnings is more than just numbers. You must look at the type of industry the company is in, macro economics affecting that sector, the industry, and the global economy. You need to look at firm-specific items, such as a change in upper management, a new growth strategy, new products in the pipeline, etc.

Many professional analysts do just what we’ve discussed above, and issue estimates of what they believe a company will make. These estimates are given by quoting the Earnings Per Share (EPS) of the company. The EPS is simply the company’s forecasted earnings divided by the number of shares outstanding.

Basically though, nobody can really tell you the exact reason why stock prices change. People devote their entire careers toward this field - it is large and deep.

How do I Purchase a Stock?
You can purchase single stocks through any number of brokerages. These brokerage houses will charge a commission for each transaction. Some online brokerages, such as Scottrade charge only $7 per transaction. The growth of the internet as a trading medium has exhibited significant downward pressure on the costs of stock trading (and this is a good thing). Some other online brokerages you could look at would be Sharebuilder or E-Trade.

How do I know when to buy a stock and when to sell it?
There are many sophisticated mathematical models, technical analyses, strategies, omens, rituals, software packages etc. that supposedly help you buy low and sell high in the market. And there is no doubt that some people possess a special nack for it. Others lose their shirts.

Some people are big proponents of passive investing as a solid investment strategy. Others totally disagree.

It comes down to what you personally feel good about doing. I wouldn’t even think about investing in stocks unless I was:

1. Budgeting faithfully
2. Out of debt
3. Living with a fully-funded emergency fund

Hopefully this little introductory article gave you a small insight into the world of stocks. There’s a ton to know out there. Good luck on your investing!