What are stocks and shares?

The stock market is one of the most recognisable and talked about areas of financial trading. Each day billions of dollars are exchanged by traders, buying and selling shares of individual companies on the stock market.

What exactly are shares (also often referred to as "stocks") and what exactly is the stock market?

Shares are a unit of ownership in a company
If you buy a share of a company, you have bought a unit of ownership of that company. This is why companies that allow people to buy their shares are referred to as public companies – they are owned, in part, by the public.

If you own just one share of a public company, you are a shareholder of that company. The more shares of a company you have, the higher the percentage of the company you own.

People buy and sell shares to make a profit

The main reason that anyone will buy a share of a company is to make money. They believe they will either get a return from dividend payments – part of the company's profit made to the shareholder by the company – or that the demand for the shares they buy will increase and they will be able to sell them at a later date for a profit.

If the demand for the shares of a company increases, then the price of those shares also increases.
There are multiple reasons why the demand for shares goes up, however, to illustrate this, let's use a simple example.

Due to the fact that buying shares can give the owner benefits, such as dividend payouts, there is a certain amount of demand for them.

If the company is very healthy and increases its profit, then the dividend payout is likely to go up. More people will want to buy those shares, which means that the price of those shares will also increase. This is just one scenario in which the demand for a company's shares will go up.

Does it make sense to buy and sell shares?

Buying and selling stocks and shares is riskier than holding cash in a savings account. Over the long term however, it tends to produce much better returns.

Compared with typical annual returns of 3% for a savings account, or 5% for a high-interest savings account, you could make profit of as much as 50% per year through trading shares in a single company - if you stock pick correctly. That said, you also face the risk of a similar sized loss.

Shares in general do however tend to outperform both cash and fixed-income products like bonds. Simply buying the FTSE 100 index of large UK-listed stocks could earn you 5% to 15% a year if held over the long term.

You could also achieve this by investing in a well diversified portfolio. Read the Intro to portfolio building to find out how.

Trading shares

Traders will try to determine whether the demand for those shares will increase in the future, so they can buy them at a low price and sell them for a higher price.

Through a mechanism call short selling – selling share without actually owning them – traders will also try and sell shares in the anticipation that they will decrease in value, in order to buy them back at a lower price.

The methods that people use to judge whether the shares of a company will go up or down in value are numerous.

For example, traders will look at the financial statements of a company, the products that the company is developing, possible growth prospects, the current business environment, as well as price charts – anything to determine whether the demand, and hence the price, will increase or decrease.

Shares are bought at the stock market through brokers

An individual cannot buy shares directly from someone or directly from a company (there are special circumstances where you can purchase shares directly, but we will focus on trading in the stock market for the purpose of this lesson).

People have to go to a stock market to buy and sell shares and access to the market is provided via a broker.

Short term trading vs long term trading

Traders will open long or short positions and can hold these positions for any time span they wish. Some traders prefer short term trading, holding trades for a few minutes and some prefer holding trades for longer periods.

Short term traders

Traders who are focused on short term horizons are likely to focus on technical analysis to take advantage of short term price movement. The long term prospects of a company are much less relevant because the trader is not looking to hold a trade for longer than a day, a few hours or even a few minutes.

This is not to say that the fundamentals of a company are completely ignored, because there are certain news announcements that can change the price of a share and short term traders can take advantage of this.

Longer term trading

Traders that hold positions for a longer term focus more on the fundamentals of a company to see if a price movement is likely to continue. A price movement will continue if the demand for those shares is sustained and so those looking to hold on to shares for a while will look at the longer term prospects of the company.

Technical analysis is not abandoned when trading on a longer time frame – a price chart can show good points to buy and sell. Predominantly, however, they rely on the fundamental analysis of a company to determine whether they are going to trade the shares of a particular company in the first place.

How to Handle Your Money While Doing Forex Trading

Now if you are a new forex trader then your best bet as always is to manage your money in a correct way. Bad money management can ruin you chances of making success out of your forex trading foray. There are literally thousands of people who venture into the world of currency trading but then beat a hasty retreat as they do not have good money management practices and hence lose their money very quickly.

Here are a few tips that can be very helpful while take a leap into the dungeons of the currency trading with little or no knowledge. I will call them rules for the trade each and every time you do those trades.

Always make sure that you have a put a limit on the number of dollars you want to trade or for that matter what will be the size of the trade. The other way to say this is to tell that how many trades you can leave open at any given point of time. In forex markets leverage plays a big role so make sure that your leverage does not exceed 10% of the entire account. By this I mean that you will only trade for $20 if you have $200 in your account. This is known as pip value and you should try to restrict it to $ 2 for $2000 account. I am reasonably sure that this will help you in your currency trading.

Now make a ground rule about how much you are wiling to accept as risk and stop your losses when that threshold is reached which means that when you trade plan ahead and effective planning is key to success. Set a limit for your stop loss so that you do not lose money fast or infinitely and set a limit to your profit too as that will help in narrowing the risk bandwidth.

So plan ahead and plan for both loss and profit.


Manage your risk and manage it to la level of 2% per trade.

Do not over leverage your money.



Remember it is easier to get swayed when you are making money and throw caution to winds but the fact is that will only decrease you chances of success in the long run. Strategize as if you are in marathon and not in a 100 meter dash. That is the key to your success in the forex markets.Remember money management will also help in every aspect of the forex trading including reaping in the profits and also maximizing them.

What Causes a High Rate of Inflation?

Many of you asked, "What causes a high rate of inflation?".

That is a great question. It is important that you, as a new investor, understand what causes high inflation because inflation can pose a powerful threat to your financial goals. In extreme cases, it can keep you from retiring in comfort and even meeting your day-to-day living expenses.

The Two Primary Causes of a High Inflation Rate

In most cases, there are two primary drivers of a high rate of inflation in a nation's economy. These are:

• Inflation Rate Cause #1: An increase in demand for goods relative to supply. When more people fight over fewer goods, the price increases. It is just as true for an entire country as it is for a lamp on eBay. We have seen an increase int he inflation rate, in part, because countries like China and India, which had virtually no industrial base a few generations ago, have billions of citizens poised to enter the middle class in the coming years. That means that the fixed, small supply of global copper, silver, gold, and other commodities will be bidded upon by a much larger group of potential buyers, driving up prices. In the past, a handful of industrialized nations, such as the United States, Canada, Australia, Great Britain, Germany, France, Italy, Russia, etc. were the only ones in the game when it came to requiring oil or other commodities. That time has passed.
• Inflation Rate Cause #2: An decrease in the value of each existing nominal unit of currency. Don't panic - it isn't nearly as complicated as it sounds. It's another way to say a government is printing money. If governments print money and depreciate their own currency, each dollar will buy fewer goods because dollars are less scarce. Think about it. If a school teacher is suddenly earning $150,000 per year, she is going to be able to walk into a Maseratti dealer and buy a car. But Maseratti production is limited - the company can only churn out a fixed number of high-quality automobiles each year. As more money floods the economy, the relative income of different professions isn't likely to change, so lawyers who made $100,000 before the inflation increase might be making $300,000. That means the teachers won't be able to compete with the lawyers - still - and the price of Maserattis will double or triple. That is, the numbers on price tags changes but the relative purchasing power of the individual citizens hasn't changed. The teacher won't be able to afford the car but the lawyer will. The people who get hurt are those who have large bond investmentsand other fixed incomes such as Social Security.

In a perfect storm of economic disaster, a nation might confront both of these items at the same time and in a meaningful way. This would lead to so-called hyperinflation, which is inflation on steroids. In the great inflation Germany experienced after the first world war, there are stories of wives meeting husbands at factory gates during lunch breaks to get paychecks so they could go spend the money before it became worthless later that day.

The most important steps a civilization can take to guard against a high rate of inflation is to maintain a stable currency. Mostly, this is accomplished by running balanced budgets and avoiding significant deficits. Unfortunately, if a nation finds itself in a situation where it is facing massive deflation risk due to an asset bubble popping, which just means prices were driven up because people took advantage of low interest rates to buy stuff and drive up the market price of homes, cars, jewelry, and art, the only way to avoid a Great Depression is to purposely print money and depreciate the currency.

This gets into an advanced economic concept known as the M1, M2, and M3 money supply. For those of you who are interested, I wrote about it in Why Aren't We Seeing Inflation, Yet?. This article might be too advanced for absolute beginners but it is there for those of you who want to take on the challenge of understanding why we haven't seen prices increase (as of January 2011) despite the Federal government spending trillions of dollars it does not have.