STOCK MARKET FOR BEGINNER | Stock & Option Guide

What We Offer

The optionsXpress Online Broker Education Center

Welcome to the optionsXpress Education Center. One of our goals here at optionsXpress is to provide our customers with the knowledge needed not only to invest, but to invest with confidence. This Education Center has been organized to cater to both advanced and novice investors alike, with a curriculum broken down into each of the product categories we offer here at optionsXpress:

• Options
• Futures
• Stocks
• Bonds
• ETFs and Mutual Funds

Keep in mind that optionsXpress Online Broker always has a wide array of FREE live webinar presentations from which to choose as well, covering topics from new customer orientation to specific trading strategies to timely market issues and concerns. Even if you’re not available for a specific live webinar, you’ll find an entire “on demand” library with hundreds of pre-recorded webinars from which to select at your leisure. In addition, those new to optionsXpress may enjoy our online demos for a tour of the site and helpful hints for getting started.

optionsXpress also presents a host of live, in-person educational workshops and site nightes in cities throughout the United States all year long. Find out if we’re coming to a city near you in the upcoming events section of the Education Center main page.

Now that you know what we offer, let’s begin your journey to trading knowledge.

Understanding How the Markets Work

You’ve no doubt heard people talk about the market or stock market. The reason it is called the stock market is self-explanatory. Markets are where stock or shares of publicly traded companies are bought and sold.

So what is a stock anyway? Stock is ownership, plain and simple. If you buy a share of Microsoft, you acquire a tiny sliver of the company, thus tying your fate to that of the software giant, for better or worse. This is ownership in the most literal sense: You get a piece of every desk, contract and trademark in the place. Better yet, you own a slice of every dollar of profit that comes through the door. The more shares you buy, the bigger your stake is.

As a shareholder, you have a right to have your voice heard. Once a year (or more often if the company encounters dramatic events such as a pending merger or major acquisition), the company will hold a meeting at which the shareholders can cast their votes to elect new board members or voice their opinions on directives the company may be making.

Of course, most average stock investors own such a small portion of the company that they don’t really have a huge say in what happens within the company. That’s why it’s important to do your research before you buy stock in a particular company.

Rather than attend a shareholder’s meeting to formally express your opinion on a company’s direction, the simplest way to voice an opinion is to simply let your dollars do the talking by buying or selling shares in the company. If you like what they’re doing, you can buy more shares in a show of support. If you don’t like what they’re doing, simply sell your shares and move on to bigger and better things.

Generally speaking, the stock market is made up of organized places where buyers and sellers meet to buy and sell, similar to a farmer’s market. While a farmer’s market is made up of various stands or booths where crops and crafts are bought and sold, the stock market is made up of different exchanges where people meet to exchange stock for money. Initially, if a person wanted to trade shares in a company, he or she would actually take the shares to an exchange and sell them or buy them. However, as more and more people became involved, it was obvious that not every buyer and seller could fit into one building and find someone who was interested in buying their stock. This growing reality led to the creation of the brokerage…a person or house that has a place or seat on the exchange to trade stocks on behalf of their clients.

Exchanges, Sectors and Indices

The Exchanges

There are a number of exchanges and brokerages in existence today. In order to trade stocks on an exchange, you need to have an account with a brokerage that will place buy and sell orders on your behalf. Whether you choose to call and speak with a broker directly, or trade online unassisted via Online Broker , the broker acts according to your wishes and places your trades for you.

Some exchanges still conduct most of their business through open outcry in a physical trading pit on the floor. However, electronic order execution has dramatically altered the market landscape in recent years, allowing for the quick execution of many millions of shares with greater speed and efficiency than ever before. For the purposes of this introduction to the markets, we will only consider the four major exchanges, which are the New York Stock Exchange (NYSE), the NASDAQ Exchange, the American Stock Exchange (AMEX), and the Over The Counter Bulletin Board Stock Exchange (OTC.BB). Shares in thousands of different publicly traded companies are bought and sold Monday through Friday on these exchanges.

With so many thousands of publicly traded companies from which to choose, a little organization is certainly welcome. Therefore, each and every publicly traded stock is categorized by Sector, Industry, and Industry Group.

The Sectors

Sectors are simply broad market categories found within the marketplace. Technology, Financial and Healthcare are examples of sectors, and within each sector there are further sub-categories called Industries.

Industries

Industries are more specific than the Sectors in which they belong. For example, the Technology sector is divided into the computer hardware, computer software & services, electronics, Internet and telecommunications industries.

Industries are then further broken down into Industry Groups. Take the Computer Hardware industry as an example. This group is broken down into Computer Software & Services, Electronics, Internet and Telecommunications Industry Groups. In some cases, these Industry Groups are divided even further into sub- groups. It’s important to mention that there is no one governing body that has established a standard list of Sectors, Industries, and Industry Groups. As a result, you’re likely to notice some discrepancies as you compare Sectors, Industries or Industry Groups among various sources.

Indices

As if all of that classification weren’t enough, stocks are also sometimes organized into Indices. An index is a basket of stocks assembled to represent some section of the broader market. For example, the semiconductor index is made up of 16 different stocks in the semiconductor industry group. The biotechnology index consists of 17 different biotechnology stocks. The Dow Jones Industrial Average represents a broad view of the market by including 30 different stocks from across several sectors and industries. Each index represents a different view of the broad market, and is often created by companies that specialize in market analysis and reporting. Whenever you hear market commentators refer to the “Dow” or the “S&P” (the Standard & Poor’s 500 index) they’re referring to the performance of the particular list of stocks created by Dow Jones or by Standard & Poor’s. These lists change periodically, with the intent of following the stocks most representative of certain aspects of the market at a given point in time.

Bulls v. Bears

Deciding when you should or shouldn’t place a trade, regardless of whether you’re considering a stock, options, or futures investment, depends heavily on what the current markets are doing. Once you have a handle on current market conditions, you can begin to identify the tools and strategies you’re going to use to place a specific trade.

No one really knows the origin of the terms “Bullish” and “Bearish” in the context of market trends, but you can certainly find several interesting sources suggesting their heritage. Regardless of where they originated, Bullish universally indicates an optimistic outlook, while Bearish refers to a pessimistic one.

Bullish Market Forecast = Rising Stocks

Simply put, if you think the markets are going up in general (that is, you’re bullish on the markets) then you want to find stocks and strategies best suited to capitalize on the positive price movements.

Bearish Market Forecast = Falling Stocks

If you think the markets are falling in general (you’re bearish on the markets), then you want to find stocks and strategies that are more likely to succeed when prices fall.

Keep in mind, however, that one of the fascinating aspects of the stock market is that even if the overall markets are Bearish, you’ll still be able to find a number of stocks that are actually increasing in value contrary to the overall market trend. An example of this phenomenon is when oil companies do well as the rest of the market suffers in light of high energy costs. The important thing to keep in mind is that there are often a number of stock investing strategies that work to generate profits regardless of market direction.

source