Once you’ve decided you want to buy stocks, you need a broker. You can’t go to the mall and pick up a few shares of stock just like that. The broker takes your order and goes to a stock exchange to make the purchase for you. With online brokers these days, buying stock is really easy.

Exchanges exist for all types of securities. For example, FOREX is the foreign currency exchange where people can trade currency. You can also trade stocks, bonds, and other securities on an exchange.

Stock Exchange

A stock exchange is where stocks, bonds, derivatives, and other securities are traded between stock brokers. There are many exchanges around the world that are used to bring buyers and sellers together.

The purpose of a stock exchange is to give investors a place to exchange stocks. Corporations choose to sell shares of stock in an exchange to raise capital for the company.

Stock Market

The stock market isn’t a physical location. It’s the way buyers and sellers exchange stocks and other investments. The market is how the prices of the stock are determined using supply and demand.

The exchange is where this takes place. For example, the New York Stock Exchange has thousands of companies trading. There is also the NASDAQ and many other exchanges worldwide.

Primary and Secondary Markets

When a company first decides to issue stock, it is sold in the primary market. After that, whenever these shares are bought and sold, they are traded in the secondary market. This all takes place within the stock exchange where the stocks are sold.

OTC – Over the Counter

Any company that is not listed on the stock exchange but that sells stock is considered an OTC stock or over the counter stock. You can still purchase them, just not through a stock exchange. Penny stocks and other high risk stocks are often sold over the counter.

The stock exchange is only one small component of investing. Learn more about stock investing here.

Initial Pricing

First, when a company decides to go public, it must decide how much to price the stock. Basically, it is giving everyone a chance to invest in the company. People won’t invest if they don’t think it’s a worthwhile purchase. They want to know they are paying what the company is worth and no more.

How a company chooses to price their stock initially can be based on many factors. The company works with investment firms to come up with the right price. The goal is that the price will go up over time.

Supply and Demand

Prices of all products vary based on supply and demand. When demand increases, the price goes up. When supply increases, the price goes down. Supply and demand pull on the price of stock in every which direction.

For example, if lots of people decide to purchase shares of Apple and there aren’t enough people to sell, the price will go up to encourage more people to sell and/or discourage some people from buying. It’s a balance.

Other Factors

While supply and demand move the price, what factors increase supply and demand? Why do investors choose to buy or sell? There are many factors that will affect this.

For example, there are long-term investors who choose to buy stocks that they believe are currently undervalued. There are stock traders who are constantly buying and selling stocks quickly. There are new investors that haven’t properly prepared themselves and don’t know what they are doing. There are investors who invest solely on the recommendations of friends and television shows.

Ultimately, as an investor, your goal is to look for corporations that sell stocks that you hope will increase in value in the future. You have to do the research. Which stocks are undervalued? How can you diversify effectively among those stocks?

A basic understanding of the economic principle of supply and demand will get you started in the right direction. Take that information and learn from it to build an impressive portfolio.

Stocks aren’t sold at a store, and you can’t buy stock certificates anymore, unless you purchase them through a program that sells one share for gifting purposes. As an investor, that’s not what you’re looking for. You need a brokerage account.

What is a Broker?

A broker is the person that buys stock. They need to be licensed in order to buy stock an exchange.

A stock brokerage firm is a company that employs stock brokers who make the physical purchases at the stock exchange. They do all the hard work for you. They find someone who wants to buy or sell shares of what you’re selling or trying to buy. They try to get you the best price.

Years ago, you had to call up your broker every time you wanted to make a trade. Today, with the internet, you can set up an account quickly and easily online and place your orders electronically. It’s a lot faster, easier, and more convenient.

Full Service or Discount Broker?

A full service broker is one that offers many services such as stock advice and other help. They cost a lot more than discount brokers. If you want nothing to do with your investments other than handing over your money, and you don’t care how much it costs, a full service broker can work out for you. Even if you want to know what’s going on with your money, they can help.

If you want to save money and you’re able and willing to make your own stock purchase decisions, a discount broker is the way to go. They are convenient and offer no bells and whistles. You decide what you want, place the order, and manage your portfolio online. The fees are usually a tiny percentage of what full service brokers charge.

Are you looking for a good broker? Click here for some of the top discount brokers to choose from. Pick the one that fits your needs, set up an account, and start investing.

Making the actual stock purchases is actually the easy part. It’s finding the right ones to buy that takes more time and effort. Don’t worry about it. You’ll get a hang of it soon enough.

What is a Stock Loss?

When you sell shares of stock, you have either a loss, gain, or break even. If you sell shares for more than you paid, it’s a  gain. If you sell shares for less than you paid, it’s a loss.

If you have a stock gain, you must report it as income. A stock loss is only realized when you sell your shares. Even if the value has gone down but you haven’t sold your shares, it’s not a loss. The same goes for gains. You don’t report price increases as income unless they are gains from selling shares.

Can You Deduct Stock Losses?

First, you need to determine if you have a net loss. For example, let’s say you sell 100 shares of stock A with a loss of $5 per share for a total of $500. This is a loss, however, if you also sold 50 shares of Stock B with a gain of $15 per share for a total of $750, the initial loss if offset. Now you will report a gain of $250. The loss is still factored into your tax burden, it just needs to go against any other gains first.

After offsetting any capital gains, if there are any more losses, you can use these losses reduce ordinary income up to $3,000.  For example, let’s say you have a total stock loss of $2,000 for the year and you’re taxable income is $6,000. You can deduct that $2,000 from your $6,000 taxable income.

This is a benefit for many taxpayers because the tax rate paid on gains is usually less than the tax rate paid on ordinary income. However, with losses, the savings comes with ordinary income. Let’s use the above example. If you’re in the 27% tax bracket, you’re saving 27% of that $2,000, whereas if it was a long-term gain, you’d pay 15%.

It’s good on both ends. You only have to pay a maximum of 15% on long-term capital gains, but you get a bigger tax break if you have losses. This benefit can help ease the burden and frustration that comes with stock losses.

What if Your Losses are More than $3,000?

Don’t worry about your losses exceeding the $3,000. They won’t go to waste. If losses exceed this certain amount, they can be carried over year to year. This way, they aren’t wasted. For example, if you’re are unfortunate enough to incur $9,000 in stock losses, you can carry the balance over each year until it’s used up.

Reporting Capital Gains vs Losses

The rate at which capital gains are reported varies based on whether they are long-term or short-term gains. This doesn’t matter with losses. Losses are deducted from gains and ordinary income respectively, regardless of the tax rate. As we mentioned above, losses have a greater tax savings advantage while long-term gains have a lower tax rate than regular income.

As a stock investor, your gains and losses have tax advantages. This is a great way to encourage yourself to invest more and earn more money with the stock market.

Variation in Investments

There are so many different types of stocks and bonds that it would be impossible to say that one security in general is riskier than the other. Basic investment principles may tell you to buy stocks in this economy and bonds in the opposite economy. Looking at the merits of the individual investment will help you to better determine which carries less risk.

Stocks

If you want to invest in stocks that are less risky, look for blue chip companies. These are companies that have been around for a long time with a good reputation. You are probably very familiar with many of the available blue chip companies like the following:

• Disney
• Proctor & Gamble
• ExxonMobile
• McDonald’s
• Coca-Cola
• Intel

These companies have been around for a long time and are more stable than newer companies. However, they will also probably not earn as much as newer, up-and-coming companies. If you’re okay with a lower return, blue chip companies can be a great addition to a low risk portfolio.

Small cap companies and newer growth companies are riskier. They could do extremely well and earn you a lot of money, but they could also go down in value or tank completely. Penny stocks are even worse. These are the riskiest of the stocks. They are stocks that sell for less than $5 per share and are often companies that are brand new or near bankruptcy.

Bonds

Government bonds are very low-risk, but they also offer very low interest rates. Corporate bonds can vary from each end of the spectrum. High yield or junk bonds are the riskiest and can easily be riskier than many stocks.

To help you choose low risk bonds, use bond credit ratings to determine the risk and safety of the bond. For example, you could get ratings like the following where AAA is the best:

• AAA
• AA+
• AA
• AA-
• A+
• A
• A-
• BBB+

These are the ratings used in the system of the S&P 500. There are also the Moody’s ratings and Fitch. Use these ratings to help you find appropriate bonds for your portfolio.

Are Stocks Riskier than Bonds?

Yes and no. Some stocks are and some stocks aren’t. Some bonds are very low-risk and other’s aren’t. The best thing you can do is find investments in a variety of categories and risk classes to diversify and keep your portfolio safe and earn as much money as possible.

The cost basis is used for any kind of investment. You must understand and calculate your average cost basis for stocks, or any type of investment, to have accurate records and information for your taxes. You may need this information for other purposes as well.

What is the Cost Basis?

Technically, the cost basis is the purchase price of an asset for tax purposes, adjusted for stock splits, dividends, and capital gains. In other words, you want to know how much money you earned or lost on your stocks after taking stock splits, dividends, and capital gains into consideration. The average cost basis is used to compute the cost basis.

How to Determine the Average Cost Basis for Stocks

To determine the average cost basis for stocks, first divide the amount you paid for your shares by the number of shares you own. It’s just that simple. This is how much your stocks cost you per share. You then use this value to determine the cost basis and the total gains or losses.

average cost basis = $ paid per share/# of shares

What Does this Mean for Your Taxes?

Basically, when you’re ready to do your taxes, make sure you determine your average cost basis and cost basis to help you figure out how much money to add to your taxes. Also, don’t forget about the type of tax. For example, if you sell stock long term, over 12 months, you will get a lower tax rate instead of having to pay your regular income tax rate. This is something to consider come tax season.

You see lots of big numbers and red and green arrows. You probably also know that people make money with the stock market, but how do they do it? Can anyone invest in the stock market, or do you have to be a stock broker or a financial professional?

Stock Ownership

Anyone can invest in the stock market. Buying stocks means you are buying ownership in companies. If you own a share, you own part of the company. The more shares you own, the more of the company you own.

This sounds a lot more technical and scary than it really is. As a stock owner, the most you will probably ever do is vote on board members, which isn’t a requirement either. You can make money from these stocks if the company decides to pay dividends (earnings paid per share) and you can earn capital gains by selling your shares for more than you paid.

Can Anyone Invest in the Stock Market?

If you have money to invest, you can buy stocks. Of course, don’t follow through until you know what you’re doing. Learn as much as you can about the stock market, and learn how to choose stocks effectively and build a strong portfolio that fits your needs.

How to Get Started

You don’t have to be a stock broker to buy stock. Any ordinary person can set up a brokerage account with a stock broker who will make the purchases for you. All you have to do is tell them what you want and pay a small fee.

If you want to start investing in stocks, learn about the basics of stocks here. If you want to set up a brokerage account and start investing, check out these discount online brokers. Discount online brokers are very inexpensive allowing all types of investors to start, even if you don’t have a lot of money.

The only people who will have a little more trouble getting started are minors. If you’re not old enough to have your own brokerage account, ask your parents to set up a custodial account. It’s great to start investing at a young age, but make sure you learn a lot and know what you’re getting into. Always ask your parents for help whenever you need it. Let them guide you through the process. Who knows, maybe you’ll get your parents interested in investing?

What are Stocks?

The stock market becomes a lot clearer when you understand what stocks are and why they exist. Stocks are ownership in a company. If you own shares of stock, you own part of that company.

Companies decide to sell stock because they want to raise capital for the business. They can sell as many shares at whatever price they choose.

How Stocks Play into the Stock Market

The stock market is where these shares of stock are bought and sold after the initial sale. For example, if Company B decides to sell 500,000 shares of stock at $10 per share, they issue an IPO or Initial Public Offering. If you buy 500 shares, you can hold onto them or you can sell them or buy more in the stock market.

The market is where everyone trades (buys and sells) shares, just like your local farmer’s market where farmers sell fruits and vegetables, and you buy it.

Why Is the Stock Market Important to You?

The reason people decide to buy and sell stock is to invest and make money. Buy shares of stock in companies you expect to increase in price. If you buy shares for $10 each and then sell them later for $20, you earn capital gains of $10 per share.

The Stock Market and Supply and Demand

The stock market determines the current price of each stock through the principle of supply and demand. Supply and demand is an economic model used to determine the price of something, in this case stocks, by finding an equilibrium between price and quantity.

Higher demand raises the price and higher supply lowers the price. When both supply and demand are moving up and down, an equilibrium price is reached. For example, if demand increases but supply stays the same, the price will go up. However, sometimes the demand will go up and supply will go up or supply will go up and demand will go down. The market is there to find the equilibrium and give it to you in the form of a price.

What are Stocks?

Stocks are ownership in a corporation. They are issued by corporations to raise capital for the business. Shares of stock can be bought and sold on a continual basis for gains or losses.

As a stockholder, you are entitled to voting writes and dividends that are issued because you are a part owner in the company.

What are Capital Assets?

Capital assets are asset that can’t be easily sold for cash through regular business activity. Capital assets are generally owned to help the company generate more profits and aren’t very liquid. Usually they are only liquidized as a last resort.

Capital assets aren’t meant only for immediate benefit. Companies usually purchase them with the hopes that they will continue to add value to the company for years to come and increase profits long term.

Examples of capital assets:

• Land
• Equipment
• Buildings

Are Stocks Capital Assets?

Stocks are not assets, they are equity. On a balance sheet, it is called “Stockholders Equity”. Equity is the ownership of the company. They only produce capital for the corporation one time when they are issued.

What are Stocks?

Stocks are the ownership of a corporation. A company chooses to issue stock for its company in order to raise money for further development.

Shares are the pieces of stock. When you purchase shares of stock, you purchase a percentage of the total stock. Learn more about stocks here.

For example, let’s say company A chooses to issue 100,000 shares of stock to raise money for the company. If you purchase 100 shares, you are purchasing 100 shares of stock equal to .1% of the company. You can’t just purchase just stock, you have to purchase shares of stock.

Are Stocks and Shares the Same Thing?

Back to our original question. Stocks and shares are describing the same thing, ownership in a corporation. One term is just more specific than the other. The difference is that ‘stocks’ describes the ownership whereas ‘shares’ describe how much of the total stocks or ownership you have.

When you say you ‘own stocks’, typically you are referring to all the shares you own in a handful of corporations. Here is a sample sentence that should help you to clarify the meaning:

“I own lots of stocks including shares of stock in Wal Mart, Apple, Starbucks, and Ford.”