Stocks are a type of financial asset that represent ownership in the company. By purchasing a stock, you gain part-ownership of that company and its future earnings. Stocks can be publicly traded or privately held. When an individual sells their shares in a public market, it’s called selling their stock.
When an individual purchases shares in a private market, it’s called buying shares. So if someone wants to buy 4,000 shares of Company A at $45 per share, their total cost would be $1,800 for those 4,000 shares. If they then decide they want to sell 2,000 shares at $50 per share, their profit is then $2,000 ($5000 – $3,000). They would get to keep the other 2,000 shares.
Trading Stocks
Stocks are traded on stock exchanges and through stock brokers. On the stock exchange, orders for buying and selling stocks are matched up anonymously between buyers and sellers. The price that prevails is the last price at which a buyer will purchase shares from a seller before another buyer comes in. The market makers facilitate these transactions by creating quotes for buyers and sellers to come together. When a buyer and a seller agree on a price for the stock, then trading commences.
Brokers act as middlemen between sellers and buyers by helping both sides to find each other. Generally, brokers will get you the lowest price possible when you sell your shares, and largely charge commission fees for their services.
How To Trade Stocks
Stocks are traded through stock brokers and work in the following way: When you place an order to buy or sell, it has to be matched up with another at the same time with supply and demand being equal on both sides of the deal. This is known as an “order book”.
An order book shows the supply and demand for the stock. When a buyer places an buy order, it will attract sellers from people who want to sell the stock minus their commission. When a seller places a sell order, it will attract buyers from people who want to buy the stock minus their commission.
The only way to protect yourself from losses is by setting stop loss orders in your trading platform. A stop loss is an order placed under your automated trading platform that specifies a price at which you are willing to exit a position. You need to set stop loss orders before you place any trade because they prevent you from losing everything if things go wrong and you decide to exit early.